Two things you need to know about Chinese gold reserves

When People’s Bank of China(PBOC) released its first official gold reserves figure since 2009 in back in July 2015, a lot of gold bugs were very disappointed. Before the release, it was even speculated that, the figure could reach as high as 9,816 tonnes, dwarfing US’s 8133 tonnes. But the actual figure came out is only 1658 tonnes.

While it is indeed possible to estimate how much gold has entered China, since laws and tax incentives direct Chinese gold import and gold mine supply to be sold through the Shanghai Gold Exchange(SGE). This is a nice chart made by BullionStar:

Estimated Total Chinese Gold Reserves (July, 2015)

PBOC has several options to boost its gold reserves:

  • Buy from domestic mining directly, which is not hard to believe since some mining companies are SOE(State Owned Enterprise)
  • Buy from SGE directly
  • Buy from foreign market in US dollar to diversify its FX-reservehttp://www2.rothbardiangoldprice.com/wp-admin/post-new.php

In any case, it is not hard to have doubts that how come PBOC has only increased 60http://www2.rothbardiangoldprice.com/wp-admin/post-new.php4 tonnes of gold in 6 years.

In this article, I will not try to prove PBOC is fudging the figure, but instead I will point out two things Western people are not familiar with about Chinese gold reserves.

First thing: Leave wealth with the people

It is an ancient concept in China that can be dated back before Qin dynasty. Many political theories at that time1)Hundred Schools of Thought: https://en.wikipedia.org/wiki/Hundred_Schools_of_Thought were trying to come up a solution of how to achieve leaving wealth with the people, using modern political language they are roughly like:

  • Confucius school: advocating low tax burden, allowing free enterprise, while having conservative fiscal policy2)《论语·尧曰》“因民之所利而利之,斯不亦惠而不费乎?”。翻译:如果对人民有利则让他们得利,如果对人民不利就不要耗费精力“
  • Mohism school3)https://en.wikipedia.org/wiki/Mohism:Unlike Confucius, they advocate the state should save and have a safety net for the people, and if necessary act as the last resort helper to the people.4)我无事而民自富”(《老子》第五十七章, “多藏必厚亡”(《老子》第四十四章), “知足者富也”(《老子》第三十三章))
  • Taoism school: Lao Tzu(https://en.wikipedia.org/wiki/Laozi) and Chuang Tzu(https://en.wikipedia.org/wiki/Zhuang_Zhou) were the advocators of Laissez-faire at that time.
  • Legalism5)https://en.wikipedia.org/wiki/Legalism_%28Chinese_philosophy%29: they think while the goal is to have a wealthy and strong nation, leaving wealth with people is possibly a necessary means to achieve that goal. 6)《管子》说:“凡治国之道,必先富民”(《治国》),“足民何可以为治”(《韩非子·六反》)“民富则不如贫”(《山权数》),“有道之国,务在弱民”(《商君书·弱民》)

Though with different approaches, leaving wealth with the people has its root deeply in Chinese political culture. An article from SCIO(State Council of Information Officer, of China) reinforced this idea, this time advocates gold as the mean of storing wealth within the people((http://www.scio.gov.cn/xwfbh/xwbfbh/wqfbh/2015/33135/xgzc33142/Document/1442021/1442021.htm “而且,中国目前已成为世界第一大黄金生产国,也是仅次于印度的第二大黄金消费国,“藏金于民”、“藏富于民”一直是我们的传统。”

With these in mind, it is not hard to understand why Chinese citizenry want to be part of this gigantic gold reserves.

Second thing: Silk Road Gold Fund and other SOE managed gold reserves

Another important factor often neglected by people is that, China has an army of SOEs. They are directly controlled by State-owned Assets Supervision and Administration Commission(SASAC). And some of them are banks that can invest in physical gold. On May 23, the Xinhua news agency reported that China planned to launch a $16.1-billion (100 billion yuan) gold fund involving the Silk Road. The fund’s two biggest initial shareholders are “coincidentally” SOEs: Shandong Gold Group bought 35% of the shares, and Shaanxi Gold Group bought 25%. And with current gold price, $16.1-billion is around 438 tonnes of gold.

In conclusion, Chinese gold reserves are largely privately held, and the rest is held by not only PBOC but other SOEs.

References   [ + ]

1. Hundred Schools of Thought: https://en.wikipedia.org/wiki/Hundred_Schools_of_Thought
2. 《论语·尧曰》“因民之所利而利之,斯不亦惠而不费乎?”。翻译:如果对人民有利则让他们得利,如果对人民不利就不要耗费精力“
3. https://en.wikipedia.org/wiki/Mohism
4. 我无事而民自富”(《老子》第五十七章, “多藏必厚亡”(《老子》第四十四章), “知足者富也”(《老子》第三十三章))
  • Taoism school: Lao Tzu(https://en.wikipedia.org/wiki/Laozi) and Chuang Tzu(https://en.wikipedia.org/wiki/Zhuang_Zhou) were the advocators of Laissez-faire at that time.
  • Legalism((https://en.wikipedia.org/wiki/Legalism_%28Chinese_philosophy%29
  • 5. https://en.wikipedia.org/wiki/Legalism_%28Chinese_philosophy%29: they think while the goal is to have a wealthy and strong nation, leaving wealth with people is possibly a necessary means to achieve that goal. ((《管子》说:“凡治国之道,必先富民”(《治国》),“足民何可以为治”(《韩非子·六反》)“民富则不如贫”(《山权数》),“有道之国,务在弱民”(《商君书·弱民》)
    6. 《管子》说:“凡治国之道,必先富民”(《治国》),“足民何可以为治”(《韩非子·六反》)“民富则不如贫”(《山权数》),“有道之国,务在弱民”(《商君书·弱民》)

    Though with different approaches, leaving wealth with the people has its root deeply in Chinese political culture. An article from SCIO(State Council of Information Officer, of China) reinforced this idea, this time advocates gold as the mean of storing wealth within the people((http://www.scio.gov.cn/xwfbh/xwbfbh/wqfbh/2015/33135/xgzc33142/Document/1442021/1442021.htm “而且,中国目前已成为世界第一大黄金生产国,也是仅次于印度的第二大黄金消费国,“藏金于民”、“藏富于民”一直是我们的传统。”

    • JanNieuwenhuijs

      Very interesting! Thanks for your insights. I would like to further communicate with you via email to cooperate if possible. You can reach me at koos.jansen@bullionstar.com.