China Fifth Largest Holder of Gold

“China has quietly almost doubled its gold reserves to become the world’s fifth-biggest holder of the precious metal, it emerged on Friday, in a move that signals the revival of bullion after years of fading importance.

“Gold rose to a three-week high of more than $910 an ounce after Hu Xiaolian, head of the secretive State Administration of Foreign Exchange, which manages the country’s $1,954 billion in foreign exchange reserves, revealed China had 1,054 tonnes of gold, up from 600 tonnes in 2003.

“The news could spark interest in gold among other central banks. ‘When the largest holder of foreign exchange reserves discloses an increase in gold holdings, other countries may decide to think more carefully about underweight gold positions,’ said John Reade, a precious metals strategist at UBS.

“The increase in China’s gold reserves has come primarily from domestic production and refining. However, the news raises questions about the future of Beijing’s foreign reserves policy.

“Ahead of the G20 summit in London this month, China suggested global reliance on the US dollar as a reserve currency should be reduced.

“China has been diversifying away from the dollar since 2005, when it broke the renminbi’s peg to the US currency and officially marked it to a basket of currencies, but it still holds more than two-thirds in US dollar-denominated assets by most estimates.

“As its trade surplus and forex reserves ballooned in recent years, Beijing continued to buy huge amounts of US Treasury bonds while raising the proportion of purchases it allotted to other currencies and to gold.

“‘China’s announcement signals a broader shift in central banks’ attitude towards gold,’ said Philip Klapwijk, chairman of GFMS, the precious metal consultancy.”

Source: Jamil Anderlini and Javier Blas, Financial Times, April 24, 2009.

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