The role of gold in China: Yuan vs Dollar

In April 2019, the People’s Bank of China made the largest purchase of gold over the past three years. The country purposefully builds up the gold reserve, the real amount of which remains a mystery to the world community.

The trends of recent years indicate that the yellow metal has become the most important element of the national strategy for the development of the Chinese state.

The Chinese gold revolution

Twenty years ago, the country's gold market was relatively small. Fundamental changes occurred in 2002, when the ban on gold trade was lifted. In the same year, the Shanghai Gold Exchange was officially opened – today it is the largest hard commodity trading platform (physical gold trading).

The Chinese government launched a large-scale campaign to promote gold among the population, causing a surge in demand for gold and accelerating the pace of mining activities. In 2007, China became an indisputable gold mining leader and has been maintaining its status for 12 years.

In the chart: the dynamics of gold mining activities in China since 1970.

Gold is bought not only by the Chinese government, banks and people. The Chinese progressive electronics industry fuels the demand for gold as well. Today, China ranks first in the world in terms of gold consumption.

According to Aram Shishmanian, who occupied the post of CEO of the World Gold Council* for 10 years, the global gold market is undergoing a historical transformation led by China.

In recent years, the country has created a business-friendly environment, the favorable conditions of which attract foreign investors and expand the range of gold-related services.

In the photo: Shanghai – the heart of the Chinese gold market.

Gold will support the yuan

For a country aspiring to become a potential superpower with the world’s leading economy, it is important to have a stable and globally recognized currency. This issue is of serious concern, given that the trade war between China and the United States entered a new stage.

In 2013, the Chinese government shared the details of the “One Belt, One Road” initiative, which is planned to be fully implemented in 2025. The ambitious project will encompass more than 60 countries and will contribute to the strengthening of economic and cultural ties between various states. China takes the lead in this process, that’s why it needs a stable currency.

The best way to strengthen the position of the Chinese yuan is to back it up with gold. In 2014, President of the China Gold Association (CGA) Song Xin announced his intention to increase the country's gold reserve to 8500 tons, scoring the top position in the global ranking.

In the chart: China's "golden appetite". In recent years, the country has been actively increasing its gold reserves.

In 2016, after the start of China’s bulk purchases of gold, the IMF* added the yuan to the basket of reserve currencies*. The Chinese currency immediately became the third largest currency after the US dollar and the British pound sterling.

The local authorities are certain that gold will create many advantages for the country, helping the yuan to become the main international currency. History shows that vast gold reserves have strengthened the US dollar, the British pound sterling and the euro, and China intends to follow the same path.

Financial protection for ordinary citizens

According to Singaporean analyst Koos Jansen, the population of China owns almost 15000 tons of gold.

British financial expert Alasdair Macleod argues that for Asian people, gold has the same value as money. The people of China consider gold the safest asset that protects investments from inflation.

In the chart: the annual growth of the minimum wages in China (in yuan).

The well-being of Chinese citizens is improving year after year, and they are actively investing in gold. Investment gold bars are the most popular choice so far.

According to forecasts, the Chinese middle class will reach 500 million people by 2020. The demand for gold from wealthy residents will steadily grow, positively affecting the price of the yellow metal.

On May 27, 2019, the price of gold is $1,286 per ounce. The price of an ounce of gold in Chinese currency – 8865 yuan.

China strives for global supremacy and is betting on gold to achieve the ultimate goal. The Asian giant tries to dominate all gold-related areas. A high level of trust in gold results from its reliability and the numerous time-tested advantages.

The relentless need of China and other countries for the noble metal will be the key growth driver of gold prices in the coming decades.

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Glossary:

*The World Gold Council — the market development organization, founded by the world's leading gold producers to stimulate demand for gold.

*IMF (International Monetary Fund) — a specialized agency of the United Nations that monitors the stability of the global financial system and provides loans to countries.

*A reserve currency (aka anchor currency) — a universal currency that is held in significant quantities by central banks as part of their foreign exchange reserves.