People’s Bank of China

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Introduction

Through it’s central bank, the People’s Republic of China holds the world’s 6th largest central bank gold holdings, with over 1800 tonnes of gold held in its official reserves of the People’s Bank of China. These gold reserves holdings are notable for having quadrupled since the early 2000s amid much secrecy. Since mid 2015, however, the Chinese government has embarked on a revised communication policy of releasing monthly updates on the size of its gold holdings. Although there is no official confirmation of gold storage arrangements, it is thought that the Chinese official gold reserves are vaulted in Beijing, China’s capital, and may be under the protection of the Chinese army.

Ownership of Chinese Gold Reserves

China’s official gold reserves are owned by the People’s Republic of China (PRC) and held and managed by the People’s Bank of China (PBoC). Although the PBoC was founded in 1948, it did not become the central bank of the People’s Republic of China (PRC) until 1983 when the PRC State Council granted the PBoC the functions of a central bank. The PBoC lists one of its responsibilities and tasks as:

“Holding and managing the state foreign exchange and gold reserves“^[1]

PBoC – Accumulation of Gold Reserves

Chinese central bank gold reserves have more than quadrupled since the early 2000s, rising from approximately 400 tonnes in 2001 to over 1,800 tonnes today^[2]. The actual accumulation pattern of this gold is hard to decipher. This is because from 2001 through to mid-2015, the PBoC only issued 4 public announcements in total addressing the size and growth of it’s gold reserves. These gold reserve increase announcements and their dates, are as follows:

• In Quarter 4 2001: From 394 to 500 tonnes
• In Quarter 4 2002: From 500 to 600 tonnes^[3]
• In April 2009: From 600 to 1,054 tonnes^[4]
• In July 2015: From 1,054 to 1,658 tonnes^[5]

PBoC Gold Purchases on the International Market

In July 2015, when the PBoC announced the first update to its gold holdings since 2009, it also stated that the “major channels of accumulation” were from domestic gold production, secondary domestic scrap sources, purchases in foreign markets, and other transacting in the domestic market.

Beyond this general statement, neither the PBoC nor any other Chinese State entity comments on where the PBoC sources its gold purchases. On the surface, it would arguably be logical to assume that the PBoC buys gold on China’s main gold market, the Shanghai Gold Exchange (SGE)^[6]. There are, however, many indications to suggest that the PBoC does not buy gold on the SGE. These indications include the following:

• Physical gold on the SGE is traded in Chinese Yuan. The PBoC has a preference to buy gold using US Dollars.
• The PBoC prefers to hold London Good Delivery (LGD) gold bars (400 oz or 12.5 kg bars). The SGE rarely trades LGD bars.
• The central bank sector, including the PBoC, has a motive to keep its gold purchases hidden so as not to cause market volatility. Gold bought on the SGE is visible and shows up in the Exchange’s statistics.
• Central banks buy monetary gold or else buy non-monetary gold and monetize it, and do not have to report it through customs data channels. Gold imported into China for distribution on the SGE will show up in customs statistics of the supplying countries. Hence the PBoC would want to avoid this^[7].

Additionally, anecdotal information from bullion banks and gold consultancies suggests that the PBoC purchases gold from counterparties on international wholesale markets using Chinese commercial banks such as ICBC and BoC as buying agents (proxies). These markets include the London Over-the-Counter (OTC) market using counterparties such as JP Morgan, and also South African and Swiss refinery counterparties. This would also suggest that Rand Refinery large gold bars and Swiss bar brands such as PAMP may be among the PBoC’s gold holdings.

According to the bullion banks and consultancy sources, the PBoC monetises its gold purchases into monetary gold prior to importing it into China. Since monetary gold crossing borders is exempt from disclosure, this approach would allow the PBoC to avoid reporting gold movements, for example from London to Beijing, through customs channels, thereby keeping Chinese central bank gold purchases ultra-secretive.

Between 2009 – 2010, the International Monetary Fund (IMF) sold 400 tonnes of gold in a series of on-market and off-market sales. The off-market sales were to a series of central banks including India and Bangladesh. At the time, China was said to be interested in purchasing some of the IMF gold, but it’s name failed to appear in the final off-market buyer list. The on-market sales, conducted from February to December 2010, were supposedly sales to the wider gold market. However, information about these on-market sales has remained classified and looks to have utilised the Bank for International Settlements (BIS) as selling agent. In this light, it’s distinctly possible that the IMF gold some of its gold to the PBoC in 2010, but that the transactions were hidden within the on-market sales process so as to prevent the identity of a Chinese state entity as buyer emerging. According to a China Gold Association (CGA) official at the time in 2010, a “purchase or even intent to do so [by China] would trigger market speculation and volatility“^[8].

This view of the Chinese state not wanting to influence the gold market through its gold purchases was reiterated in a statement from the PBoC in July 2015 when it revealed an update to its gold holdings:

“On the basis of our assessment of the value of gold assets and our analysis of price changes, and on the premise of not creating disturbances in the market, we steadily accumulated gold reserves through a number of international and domestic channels.”^[9]

PBoC Gold Storage

As with most things in the central bank gold market, information on the Chinese gold reserves is highly confidential, and the PBoC does not disclose where its official gold reserves are stored. One London source in the gold market has indicated that the Chinese official gold reserves are stored in vaults in Beijing. Another view stated that the gold reserves are under the control of the Chinese People’s Liberation Army (PLA)^[10]. Therefore, the PBoC gold reserves may be stored in Beijing under the protection of the PLA. It’s notable that the headquarters of the PBoC is in Beijing, and not in China’s financial market capital, Shanghai.

China’s Overall Reserve Assets

Gold only represents a tiny fraction of China’s total holdings of foreign reserve assets. China holds over US$ 3 trillion in foreign reserve assets^[11], predominantly as major foreign currency reserves. China’s reported gold holdings of approximately 1850 tonnes, although substantial, have a market value of approximately US $ 70 billion, which only comprises 2.3% of this US$ 3 trillion of total reserve assets. In comparison, Germany, France and Italy’s official gold holdings represent between 60 – 70% of those countries’ total reserve assets.

However, given that the PBoCs total reserves are so large, it would be difficult for the Chinese central bank to increase its gold reserves as a percentage of its total foreign reserves. As the PBoC stated in 2015^[12]:

“Gold has a special risk-return characteristic, and at specific times is not a bad investment…But the capacity of the gold market is small compared with China’s foreign exchange reserves; if foreign exchange reserves were used to buy large amounts of gold in a short amount of time, it will easily affect the market.”

Therefore, either China’s gold holdings accumulation has a long way to go to even approach a meaningful level of diversification, or perhaps China has far larger official gold reserves than it reports and a level of gold holdings higher than 2% of total reserves.

Reporting of PBoC Gold Reserves

In mid 2015, when the PBoC announced that its official gold holdings had risen to 1,568 tonnes (53.32 million troy ounces) from the prior number of 1,054 tonnes (33.89 million troy ounces) reported in April 2009, the Chinese central bank also made a policy change to its gold reporting by announcing that going forward, it would release updates on the size of its official gold holdings on a monthly basis.

Monthly updates of the PBoC’s gold reserves are published on the State Administration of Foreign Exchange (SAFE) website in English under data category “Official Reserve Assets”^[13]. The data for gold is only reported in US dollars and needs to be converted into ounces / tonnes using month-end US dollar gold prices. For example, at month-end November 2016, SAFE reported that China’s official gold reserves were valued at US$ 697.85 billion. At a November 2016 month-end gold price of US$ 1178.10 per troy ounce (LBMA Gold Price), China’s gold holdings equated to 59,235,209 ounces or 1842.5 tonnes. This is the same amount reported by China to the International Monetary Fund (IMF) and published on the IMF data website^[14].

Gold Transfers from other Chinese State entities

All major parts of the Chinese gold market were established by and are owned by the Chinese state. As well as the PBoC, the State Administration of Foreign Exchange (SAFE) reports to a Communist Party of China (CPC) committee, and was split off from the Chinese central bank in 1983. The State Administration of Foreign Exchange (SAFE) manages China’s current and capital accounts, administers China’s balance of payments, and supervises the Chinese foreign exchange market. But its also carries out intervention operations using China’s foreign exchange and gold reserves.

Central Huijin Investment Company, through which the Chinese government maintains interests in China’s largest commercial banks, was created by SAFE in 2003, and since 2008 has been a fully-owned subsidiary of China’s sovereign wealth fund China Investment Corporation (CIC). CIC is itself owned by the People’s Republic of China (PRC). The Shanghai Gold Exchange (SGE) was launched by the PBoC in 2002 and is supervised by the PBoC. Prior to the formation of the SGE, the PBoC directly managed the entire Chinese gold market. The China Gold Association (CGA) was launched by the PRC and the State Economic and Trade Commission.

A number of large Chinese commercial banks such as ICBC, Bank of China, CCB, BoCom and ABC are heavily involved in the Chinese gold market. These banks are all Chinese state controlled. State-controlled Industrial and Commercial Bank of China (ICBC) has the Ministry of Finance and Central Huijin Investment Company as controlling shareholders. Bank of China (BoC), which until 1979 was actually managed by the PBoC, use to run SAFE. Central Huijin Investment Company now has a controlling interest in BoC. Central Huijin Investment Company is also a controlling shareholder of China Construction Bank (CCB).

Since the People’s Republic of China (PRC) is a centrally planned and controlled economy, it’s distinctly possible that other Chinese state controlled entities also accumulate gold reserves on behalf of the Chinese government and either transfer this gold to the PBoC at sporadic intervals or else maintain their own distinct gold holdings for future amalgamation. A gold accumulation strategic by the Chinese government utilising a number of state entities would therefore make the reporting of gold reserve holdings by the PBoC only one element of a broader long-term State gold buying strategy.

References and Links

1.^ About the PBoC, People’s Bank of China website http://www.pbc.gov.cn/english/130712/index.html

2.^ World Official Gold Reserves by country, World Gold Council http://www.gold.org/research/latest-world-official-gold-reserves

3.^ Quarterly time series of official gold reserves World Gold Council https://www.gold.org/research/quarterly-times-series-world-official-gold-reserves-2000

4.^ “China’s gold reserves reach 1,054 tonnes”, Xinhua – China Daily, 24 April 2009 http://www.chinadaily.com.cn/china/2009-04/24/content_7714124.htm

5.^ “Analyzing PBOC Official Gold Reserves Increment”, BullionStar Blogs 19 July 2015,  https://www.bullionstar.com/blogs/koos-jansen/analyzing-pboc-official-gold-reserves-update/

6.^ Shanghai Gold Exchange, Chinese Gold Market, BullionStar Gold University https://www.bullionstar.com/gold-university/chinese-gold-market#heading-5

7.^ “PBOC Gold Purchases: Separating Facts from Speculation”, BullionStar blogs, May 2015 https://www.bullionstar.com/blogs/koos-jansen/pboc-gold-purchases-separating-facts-from-speculation/

8.^ “IMF Gold Sales – Where ‘Transparency’ means ‘Secrecy’”, BullionStar Blogs, September 2016 https://www.bullionstar.com/blogs/ronan-manly/imf-gold-sales-transparency-means-secrecy/

9.^ “China gold holdings jump 57 pct in 6-year reserve update”, Reuters, July 2015 http://www.reuters.com/article/china-gold-reserves-idUSL4N0ZX39R20150717

10.^ Gold author, James Rickards, tweet in relation to PBoC gold reserves security, August 2015 https://twitter.com/JamesGRickards/status/633519732981784576

11.^ The Scale of China’s Foreign Exchange Reserves, SAFE website http://www.safe.gov.cn/en/ForexReserves/index.html

12.^ “China breaks 6-year silence on gold reserves”, Financial Times, July 2015 https://www.ft.com/content/2c67f078-2c6d-11e5-8613-e7aedbb7bdb7

13.^ China’s official reserve asset monthly updates,  State Administration of Foreign Exchange (SAFE) website http://www.safe.gov.cn/en/

14.^ Official gold reserve holdings per country, IMF website, See International Financial Statistics (IFS) http://data.imf.org/