China Should Consider Increasing Gold Reserves, Central Bank Adviser Says

China should consider adding to its gold reserves as a long-term strategy to pave the way for the yuan’s internationalization, central bank adviser Xia Bin wrote in the China Business News today.

The country must revise its foreign-reserves management principle, Xia wrote. China is the world’s largest producer and second-biggest user of gold and has a world-record $2.65 trillion in foreign-exchange reserves.

Gold is set for a 10th annual increase, the longest winning streak since at least 1920, spurring central banks globally to add the metal to reserves. China is allowing greater use of its currency for cross-border transactions to reduce reliance on the dollar, after Premier Wen Jiabao said in March he is “worried” about holdings of assets denominated in the greenback.

“If China increases gold buying significantly to diversify their foreign exchange reserves, that could affect the market,” said Park Jong Beom, a trader at Tong Yang Futures Trading Co. in Seoul.

Gold for immediate delivery increased 0.4 percent to $1,390.32 an ounce at 12:49 p.m. in Shanghai, boosting this week’s gain to 2 percent, as China’s imports increased and a fall in the dollar boosted the appeal of the precious metal as an alternative asset.

Imports of gold by China jumped almost fivefold in the first 10 months from the entire amount shipped in last year, the Shanghai Gold Exchange said yesterday. Shipments were 209 metric tons compared with 45 tons for all of 2009, said exchange Chairman Shen Xiangrong.

State Buying

“In the mid and longer term, of course, I think China is the biggest bullish factor for gold prices,” Yuichi Ikemizu, head of commodity trading at Standard Bank Plc in Tokyo, said, referring to the gold imports by China. Still, “the advisors are not the guys to decide policies of the central bank. They can advise whatever they want and the percentage of gold in foreign reserves is really small.”

The country increased gold reserves by 454 tons to 1,054 tons since 2003, the State Administration of Foreign Exchange said last April. The metal only accounts for 1.6 percent of the nation’s reserves held by the People’s Bank of China, according to the World Gold Council. China doesn’t regularly publish gold- trade figures and rarely comments on its reserves.

Bangladesh bought 10 metric tons of bullion from the International Monetary Fund for about $403 million in September. That followed a 200-ton purchase by India last year, as well as reserve increases by other Asian nations including Sri Lanka.

Solvency

Building gold as the basis of solvency has been used through history, PBOC adviser Xia wrote. Having a corresponding amount of solvency is a necessary precondition and indispensible safeguard in the long-term strategy for the internationalization of the yuan, Xia wrote.

China also needs to set up a commission soon under the State Council to make plans for investing its foreign reserves overseas, Xia wrote. The investments should include oil, resources, equipment and technology, Xia said.

The non-convertibility of the yuan is a major hurdle in China’s efforts to become a “real financial power,” Bank of China Ltd. Chairman Xiao Gang wrote in a commentary published in today’s China Daily.

The Chinese currency will only become an international monetary unit like the Euro or the dollar once it can be freely converted into foreign currencies, Xiao wrote.

Yuan Transactions

Trade transactions settled in the yuan may rise to $3 trillion a year by 2015 as China pushes for the wider use of its currency as an alternative to the dollar in business and finance, China Construction Bank Corp. said Nov. 23.

China Construction Bank, which helped organize the biggest number of bond sales in China this year, forecasts an increase from the current $19 billion a year of yuan-denominated trade transactions, or commercial deals primarily paid for and financed using the yuan that don’t involve the dollar.

China should raise its gold holdings and the 1,054 tons of reserves are inadequate compared with the 8,133 tons held by the U.S. and 3,408 tons by Germany, Meng Qingfa, a researcher at the China Chamber of International Commerce said on Oct. 27.

“China does not hold much gold in its reserves for now so I cannot immediately see what impact it will have on gold prices,” Tong Yang Futures’ Park said.

To contact the editor responsible for this story: Bloomberg News at jliu42@bloomberg.net

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