Chinas Purchase Of Large Quantities Of Domestic Gold

Only last year China bought 454.1 tons of domestic gold. Why such a massive amount, and why buying it on its domestic market is what analysts tried to figure out. Chinese citizens possess themselves an impressive amount of gold, more precisely 3,000 tonnes - most of it acquired over the last five years. Given these high figures, it is no exaggeration to say that they indicate an unprecedented gold hunger both governmental and individual. As to its cause, even if considering the demographic indicators and the availability of the said gold in the conditions in which China is the largest producer in the world of the precious metal, the explanation does not seem to be sufficient.

The high gold consumption by the Chinese people that it is expected to double in the next 10 years seems to arise from the threat of the continuation of the global economic crisis: people try to find alternative safer ways to preserve or increase their wealth, turning their attention to gold, known for its perennial value, therefore they prefer to purchase jewelry or gold bullion instead of buying currency. What about the Chinese government? No matter the failure of the fiscal and monetary policies when faced to the worst global economic crisis ever, why to purchase such an amount of gold, and domestic one?

But the reason for the Peoples Bank of China buying such an amount of gold is less apparent. First, without reducing the significance of such an impressive purchase, gold represents only 1.6% of the total Chinese reserves, which are nevertheless the largest worldwide. The remainder consists of US governmental bonds. As such, what is of great concern for the central bank when buying gold is the $744 billion represented by its American treasuries. The last thing it would like to see is to determine an increase in the price of gold. It is interested in maintaining a low price on the domestic market for its citizens and its own purchases after all. On the other hand, a higher gold price would mean a weaker dollar, or what would happen to the value of its numberless US bonds?

So everything is about its economic interests in the USA. China tries to avoid to the extent it is in its power the further devaluation of the dollar. The reason is not only the bonds it owns but also the fact that China is the main exporter on the American market, a fact that accounts for its fast economic growth.

Thus, China is purchasing its domestic gold because it is available, maybe its price is lower and as an insurance of its massive US dollar reserves. In a global economy, the economic behavior cannot be accounted for by looking only at national causes.

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