China produces the most gold out of all nations worldwide, yet its central bank has also been leading the recent gold-buying frenzy as a political tactic to reduce its reliance on the U.S. dollar. In 2022 alone, China produced 375 tons of gold. So far this year, the People’s Bank of China has already purchased 181 tons of gold out of the total 800 tons purchased by all central banks during the first nine months of the year.
As of July, estimates show China carrying around 2,113 tons of gold in its reserves. Following this total and its recent purchase figures, China ranks in fifth place for the most gold reserves, with the top-ranking nation being the United States.
What makes China unique here is its reserve allocations. While the U.S. Federal Reserve allocates over 60% of its reserves to gold, China allocates just 4% to the yellow precious metal. Because of this small percentage, it’s clear that the nation has plenty of room for growth, hence its recent hefty purchases.
The People’s Bank of China has now achieved 11 consecutive months of net gold purchases on record. Most analysts believe these actions relate to a greater de-dollarization strategy. As geopolitical tensions heighten and currencies become more volatile, China wants to move away from dollar-based assets toward something more universal, secure, and inflation-proof, like gold.
“It’s probably a diversification strategy, and it’s probably part of an effort to reduce their vulnerability to any potential sanctions that the United States would pose on the Chinese financial system,” Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics, explained in an interview with Newsweek.
Analysts like Lardy believe that China’s gold buying isn’t meant to impact the U.S. economy. Rather, the increased reserves, in theory, would strengthen China’s economy as numerous markets, like bonds, suffer. Then, as China continues cutting itself off from Western nations, it would have the fiscal strength to continue thriving.
“I think they see what has happened to Russia, and they see what’s happened to Iran being cut off from international financial networks. They’ve been promoting the RMB [Chinese yuan] as an international currency—they haven’t had much luck yet, but that’s certainly their long-term goal—they want to diminish the role of the dollar, so it seems perfectly logical that they would diversify their holdings, their official foreign exchange holdings, away from the dollar,” Lardy continued.
Essentially, China wants to redefine how nations trade internationally. Rather than falling behind with the U.S. dollar, China wants to be at the forefront of monumental change, shifting away from the U.S. dollar toward a new asset that would give it more power and security.
De-dollarization is not China’s only reason for purchasing and producing gold, though. Nations around the globe have been stockpiling gold to hedge against inflation, and China is no different. With assets like Treasuries and the U.S. dollar continuing to lose value, central banks are simply looking for a more inflation-proof option, and gold provides exactly that.
“I think this is an investment decision, pure and simple,” Julian Jessop, an economist at the Institute of Economic Affairs, explained in an interview with Newsweek. “Central banks have been diversifying out of U.S. dollar assets for some time, so this is part of a broader trend. Indeed, switching from U.S. government bonds to gold has been a good trade recently, as the Treasury market has slumped.”
At the same time, central banks around the world have been raising interest rates all year to combat inflation. The United States, for example, increased rates this year faster and more aggressively than any year in the last few decades. Such monetary strategies only drive down the bond market further to levels not seen in decades.
In this same environment, gold continues to remain stable against inflation, with gold futures steadily appreciating by approximately 5,700% since 1971. Between failing currencies and stable gold, the choice becomes obvious for many central banks.
“Most central banks are concerned about the stability of their assets, the liquidity of their assets, and so forth,” Lardy explained. Given this reasoning, it makes sense that gold reserves carried in central banks hit an all-time high in June of 38,764 tons.
China has maintained its position as the leading gold buyer for quite some time now, and most expect it to stay this way. While China’s specific reasonings for buying gold are quite complex, many of its strategies stem from universal concepts that numerous central banks can relate to. Because of this, we’re seeing the record levels of central bank gold buying continue throughout 2023.
