My previous blog explored a little about China's mercantilism and their ridiculous need for gold (and other commodities like silver) to enforce their economic policy, which maximized exports and minimized imports.
Believe it or not, China would gladly buy more gold yearly to increase its gold reserve. The problem is there is not nearly enough gold in the market to satisfy the inexhaustible demand of China.
China's exports are enormous, approximately 3.36 trillion U.S. dollars in 2021 alone. Some say China's economy is dying, but over the past 10 years, China's exports have grown steadily, with the exception of 2009 and 2016, when global demand dropped. With robust export, China is able to maintain a trade surplus almost every year.
[Source: tradingeconomics.com]
The surplus reached $676.43 billion in 2021, which was the highest since records began in 1950, up from $523.99 billion in 2020, heightened by the post-covid economic recovery. With great surplus comes great spending as China has to spend those earnings on something. Note that most international trades are settled in USD. Exchanging dollars for Chinese Yuan is not an option as it will pump the price of RMB against the USD, making China's exports expensive. What China usually does is buy U.S. national debt.
China is losing faith in U.S. national debt.
[Source: ceicdata.com]
U.S. treasury securities are the best investment for China to spend all its trade surplus. But there's a catch, and China knows it. That's why its U.S. treasury holding is going down YoY.
Remember how the West and U.S. freeze 630bn of Russia's foreign-denominated financial reserves? We all know that and China knows it especially well. China invests in U.S. Treasuries instead of real estate, stocks, or the debt of other countries because they are safe and stable. But this could no longer be the case.
The U.S. could cancel its sovereign debt held by China. The only problem with the U.S. defaulting on debt to China is that it would destroy the full faith and credit of the U.S. Trump talked about "cancelling" the U.S. national debt held by China during the trade war, and everyone thought he was stupid. But what if China invaded Taiwan? That would give U.S. a legitimate reason and moral high ground to refuse to pay back its $1 trillion debt to China. You touch Taiwan, and your money goes bye-bye. Sounds reasonable. So, investing in the U.S. treasury is not the best option for China anymore, and the second best option is to hoard commodities like gold (and other metal, including silver)
China's huge gold reserve.
If you Google the countries with the largest gold reserves in the world, you will see China ranked 6th with 1,948 mt of gold, while the U.S. ranked 1st with an overwhelming gold reserve of 8,133 mt. But in reality, people theorized that China holds more gold than it wants to admit. Both Russia and China have known for some time that they must de-dollarize, which is why they have steadily increased their gold holdings.
China surpassed South Africa as the world's largest gold producer in 2007. China has mined roughly 6,830 mt since 2000. More than half of Chinese gold production is state-owned, with the China National Gold Group Corporation accounting for 20%. And China keeps the gold it mines; exports of domestic mine production are prohibited.
China imports a lot of gold as well. There is some uncertainty about the amount of gold entering the country from Switzerland and Dubai. But, more than 6,700 mt have arrived through Hong Kong alone since 2000.
Add up all the gold production plus import since 2000, China's gold holding is approximately more than 11,000 mt. According to data from Shanghai Gold Exchange (SGE), China could actually own more than 31,000 mt of gold including privately-held jewellery, domestic mining and official reserve.
Conclusion
There should be no reason for China to stop hoarding gold as it's probably the best way to de-dollarize and maybe create a strong reserve currency backed by gold. Either way, China's unquenchable demand will cause the gold price to skyrocket in the long term. Silver and other commodities will pump as well, because why not? Remember that the main goal of China is to reduce exposure to assets subject to Western manipulation.