I just read this interesting article in the Financial Times. Seems like China has tired of US dollars and is looking to get rid of them.
Beijing Bets on Bullion
By Patti Waldmeir in Shanghai , Financial Times, 6 May 2009
China is expected to keep buying gold to diversify its vast foreign reserves after it recently revealed it had been secretively buying bullion.
Beijing and Shanghai-based gold industry analysts said the country had almost doubled its bullion holdings. But they said China was likely to make as many purchases as possible within its borders, rather than turn to international markets where it could push up gold prices.
Beijing’s exact gold purchasing intentions are a state secret, but industry analysts are betting on more purchases as Beijing has been clear about its desire to diversify its foreign reserves away from the US dollar. Although gold is quoted in dollars, its price usually rises when the dollar weakens.
The analysts base their bet, at least in part, on the history of another buyer: Russia. After Moscow announced it was buying bullion, it regularly disclosed information revealing almost monthly increases in its gold assets.
“I’m absolutely sure that they will continue buying because China’s gold holdings are very small in terms of the size of its economy and the growing significance of its currency,” says Paul Atherley, managing director of Leyshon Resources in China. “But we will find out about it only after they have done it.”
China’s current gold reserves represent only about 1.6 per cent of total foreign reserves, a vastly smaller percentage than the world’s average of 10.5 per cent. Nevertheless, its percentage is similar to the 2.2 per cent in Japan, the world’s seventh-largest holder. The challenge for Beijing is to attain a similar diversification, requiring large amounts of gold, without disturbing the market.
Hou Huimin of the China Gold Association, forecast that China’s gold reserves could rise in the long term to as much as 5,000 tonnes. “It won’t be a leapfrog achievement but a gradual increase along with the country’s economic status.”
One potential source of gold for China is the International Monetary Fund’s expected sale of about 400 tonnes of bullion. Analysts said Beijing could try to purchase a block of that sale in an off-market agreement.
China last year overtook South Africa as the world’s largest gold producer and is estimated to have produced 282 tonnes of gold. Some gold from state-owned producers goes directly into Beijing’s gold stockpile every year. Gold purchases from state-owned producers can be made secretly and at below-market prices, making them more attractive than international purchases.
In addition, turnover at the Shanghai gold exchange rose nearly threefold between 2007 and 2008 but it is impossible to know how much of that, if any, may have been reserve buying, analysts said.