Jul 272015

On Friday I posted on the messaging China may have been sending with its central bank gold reserves announcement. Today I will update this analysis from 2012 to estimate how much gold the Chinese government unofficially holds and how much the population holds. I estimate that the total amount of gold in China is approximately 10,950 tonnes, with the population holding 6,490t, commercial banks holding 2,060t and the government, officially and unofficially, holding 2,400t.

How much gold is in China?

Koos Jansen estimates the total amount of gold within China at 13,781 tonnes. In large part the difference between Koos’ figure and mine is due to Koos assuming that the Chinese held about 2,500t of jewellery prior to 1994. In my 2012 post I quoted a source that notes that after the revolution all gold held by citizens, and gold mined, went to the government and was used to pay for imports. The analysis that follows does not rely on this total stock figure to work out official and other government gold holdings but it does affect the balance the population holds. If you agree with Koos then you can add the 2,500t to my 6,490t estimate of private stocks.

Where does China buy its gold?

It is my view that Chinese government acquires gold both domestically and from overseas, that all of it is held with China, and that any imports are reported in customs figures. Koos disagrees with this, arguing that as we see no figures in the customs category “monetary gold” from any country reporting gold exports to China, and since all SGE transactions are non-official, the government must be buying its reserves gold from overseas and importing it without having it declared.

I agree with Koos that “the PBOC buys gold in utmost secret or it would influence the market and geo-politics” and that they may make overseas purchases, but I find it hard to believe that China can dictate to the customs department of another country that their gold exports should not be reported at all (which would draw attention to the movement and negate secrecy). I also find it hard to believe that the PBOC would buy in its name from the overseas markets. It would be impossible to hide such activity from Western bullion banks and secure carriers and the information would leak out eventually, even if it could get the movements not reported in customs figures.

In my opinion, if the PBOC did not want to buy from domestic sources, it would request a Chinese commercial bank or a sovereign wealth fund to acquire gold in their name, import it as “for non-monetary purposes” and then get them to hold it until the PBOC wanted to officially acquire/report it. This method blends any PBOC purchases in with general gold importation flow, providing the secrecy it requires. As Huang Guobo, Chief Economist at SAFE, noted: “private demand for gold purchases is actually large but it is fragmented and intangible, and it is conducted through multiple channels and by multiple subjects that have less influence on the market, so this is more efficient in terms of the gold trade”, by which I take “more efficient” to mean “minimise price impact and maximise secrecy”.

Secondly, China does want its gold reserves to have some believability. If it was importing gold without any customs reporting, then Western analysts would have no basis on which to determine whether the reported reserves existed. By acquiring gold via reported imports (albeit in non-monetary form) and domestically, it allows the sort of analysis I will do below, which means that reported Chinese gold reserves can be assessed as to their reasonableness.

Koos also argues that the PBOC mostly buys gold from overseas. In Koos’ quote of the announcement, it says the purchases occurred “through various domestic and international channels … major channels of accumulation include: purifying domestic gold scraps and gold of various grades, direct purchase of production, transaction in domestic and foreign markets”.

I think the mention of “domestic” twice and the specific forms indicates that the purchasing was not solely from overseas sources. If it was mostly from overseas why mention all that detail? I note this Telegraph article where it says that a “division of the People’s Liberation Army mines gold and transfers the metal to the Chinese finance ministry, acting outside normal commercial channels. The government also buys gold directly from Chinese producers.”

Accordingly, I believe that the PBOC or its non-official arms could easily purchase from the domestic market without negatively affecting their policy of private gold accumulation. Indeed, during temporary slumps in the domestic market, non-official purchases could be a way of supporting the local mining industry and avoiding deep discounts within China to the London price.

How much is China buying?

In yesterday’s post I presented the chart below.


It makes a simple extrapolation between the dates of the official reported gold reserves figures (in red). The green area therefore represents an estimate of accumulation of gold by non-official Chinese organisations, which was then moved into official stocks at the date of reporting.

The chart below graphs this red/green accumulation from the chart above as a percentage of the monthly flow of gold into the Chinese market (that is, imports and newly mined domestic gold).


Notice that in the early years China was officially acquiring around 45% of all the flow of gold into the Chinese market. The percentage then declines from Jan 2003 (when China reported 600t of gold reserves) because the level of imports and mining increased greatly while we are assuming that the PBOC “gradually accumulated” during that period. While the accumulation was probably not in a straight consistent line, it nevertheless shows in general how little of China’s gold flow was being accumulated by the PBOC.

However, my green line is only an assumed official accumulation based on reported reserves. No doubt there has been other non-official accumulation but the question is how much of China’s gold flow is it reasonable of the Chinese government to have acquired without restricting its stated policy of encouraging private accumulation?

To answer that I turn to some estimates made by Matthew Turner, Senior Analyst at Macquarie Group (see this tweet) on how much gold Chinese commercial banks hold, based on their annual reports (see chart below).

If I add these figures (with some extrapolation back from 2007 to 2003) to our percentage flow chart, we get the following.


This I think is interesting, as it implies that as the Chinese commercial banks expanded their gold lending (mostly to domestic gold manufacturers to support the increasing jewellery and investor demand), naturally the government had to restrict its own acquisitions (in percentage terms, not in ounces) to ensure that a reasonable amount of gold was reaching the domestic market.

You will note that the purple line seems to run very much at the 45% rate that applies prior to 2003 (the red line). Does this constitute an official policy, namely that the Chinese government aims for the private citizens to accumulate 55% of gold flows? Pure speculation on my part and possibly reading too much into a pattern on a chart, but the best basis I think on which to make an estimate of unreported non-official gold accumulation.

If I then assume a policy of no more than 45% of gold flows into government (in the broadest sense) stocks, any time the purple line falls below 45% could be points at which other Chinese government organisations are accumulating gold. On this basis I produce the chart below.


The dark blue “Unreported Non-Official Accumulation”, which totals 745 tonnes by June 2015, is the calculated plug figure, if you will, to make government accumulation equal 45% of Chinese gold flow. Adding this to the official reserves gives a figure of 2,403t. If one wants to consider government controlled gold stocks in its broadest sense, then adding the commercial banks stocks gives you a figure of 4,460t.

It is possible that the PBOC leases some of its gold reserves to its commercial banks, in which case there is some double counting. However, if the 45% thesis is correct, then all that would do is increase the “Unreported Non-Official Accumulation” figure.

I would also note that this analysis does not include any gold purchased overseas and held overseas. This is a possibility but one that I give a low probability to because it means that China is taking on some exposure to Western banks to hold their gold for them and also because, again, it would be unlikely that such information would not leak out to Western governments, negating any strategic privacy that China may wish to have with respect to its gold activities.

One final chart, which takes the data in the chart above and expresses it as a percentage share of all gold within China.


This demonstrates the “sharing” of China’s gold stocks between the government and its people and that “the policy of ‘gold held by the people’ has been well achieved”.