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China Reserves Ample to Buy World’s Gold Twice

China Reserves Ample to Buy World’s Gold Twice
Dollars brought into China are sold to banks, which in turn sell the greenbacks to the central bank, increasing the reserves. Source: Rolls-Royce Motor Cars Ltd. via Bloomberg

China’s foreign currency reserves, which have surged more than 700 percent since 2004, are enough to buy every central bank’s official gold supply -- twice.

The CHART OF THE DAY shows how China’s foreign reserves surpassed the value of all official bullion holdings in January 2004 and rose to $3.3 trillion at the end of 2012, data compiled by Bloomberg show. The price of gold increased 263 percent from 2004 through Feb. 28, with the registered volume little changed, according to data based on International Monetary Fund and World Gold Council figures. By comparison, China’s reserves rose 721 percent through 2012, while the combined total among Brazil, Russia and India rose about 400 percent to $1.1 trillion.

Dollars brought into China are sold to banks, which in turn sell the greenbacks to the central bank, increasing the reserves. That process has been fueled by trade, with China exceeding Germany to be the world’s largest exporter in 2009. The size of the reserves means the government can’t make major adjustments to its holdings on the open market, according to Mirae Asset Financial Group’s Joy Yang.

“China’s foreign-exchange reserves are a blessing in bad days but a curse in good days,” said Yang, Mirae’s Hong Kong-based chief Greater China economist, who has previously worked for the IMF.

About two-thirds of China’s assets are dollar-denominated and another quarter is in euros, according to Yao Wei, a Hong Kong-based economist at Societe Generale SA. China is now encouraging companies and residents to keep more foreign currency in a strategy known as “hiding foreign currencies among people,” meaning that the government’s foreign reserves may “gradually fall,” Yang said.

China’s reserve assets were 30.2 percent of the world total at the end of last year, compared with 14 percent at the start of 2004, Bloomberg data show. China’s total was about triple Japan’s, now the second-largest holder. Japan held about 23 percent of global reserves at the start of 2004.

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