China believed to be acquiring gold slowly and secretly

Chinese Reserve Diversification Buzz Grows Louder

By Alan Wheatley and Kevin Yao
Reuters
Thursday, July 6, 2006

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BEIJING -- The opening of an office in Shanghai to help manage China's foreign exchange reserves could accelerate its long-awaited diversification into assets such as gold and overseas equities, economists said on Tuesday.

Calls for China to wring higher returns from its hoard, believed to be invested mainly in low-yielding government bonds, are rising almost as quickly as the reserves, which an official newspaper has said swelled $30 billion in May to $925 billion.

Xia Bin, head of the financial research institute of the Development Research Center, a cabinet-level think tank, joined in the chorus on Monday, saying China should both set up an international investment fund and increase its gold holdings.

Like most countries, China shrouds its reserves management in secrecy.

But economists said Xia's proposals were sensible, especially in light of the central bank's plan, reported by state media in May, to open a "China International Reserves Center" in Shanghai this month to manage the country's gold holdings.

"I think it's part of a strategy to increase not just gold reserves but also other strategic assets," said Qing Wang, an economist at Bank of America in Hong Kong.

Stephen Green, an economist with Standard Chartered Bank in Shanghai, said the reserves center could easily evolve into an active overseas investment fund long the lines of Singapore's Temasek Holdings or Government of Singapore Investment Corp.

"Given that they look to Singapore for a lot of financial sector guidance, setting up a GIC- or Temasek-like vehicle would make a lot of sense if you have all these assets," Green said.

He thought such a move was likely within a couple of years.

Rob Subbaraman of Lehman Brothers in Hong Kong noted that South Korea had set up a GIC-style fund to manage part of its reserves, while Taiwan and India had considered using some of their stockpiles for domestic investment.

"So it does seem within the region there are signs that reserves have risen beyond the levels needed to reduce the risk of another crisis," he said.

Subbaraman said China, which has used $60 billion from its reserves to recapitalize state-owned banks, should spend more of the stash on "soft infrastructure" such as health, education, and welfare to bolster its drive to stimulate domestic demand.

He Fan, an economist at the Chinese Academy of Social Sciences, a top government think tank, said he was in favor of China owning more gold. He said it now had some $12 billion in bullion, about 1.3 percent of its reserves, a proportion also cited by central bank officials.

"I think the authorities must have realized the need to raise gold reserves, but the problem is how to achieve it," he said.

China's domestic gold output was too small to allow China to add significantly to its 600 tonne holding, while purchases on the open market would be impossible to keep secret.

"I think it's appropriate to increase the proportion to 10-15 percent to match that of some European countries. But that will translate into large demand for gold, which could push bullion prices up sharply on the international market," He said.

For that reason, Wang at Bank of America said he expected China to increase its gold holdings slowly and perhaps hide its hand by buying through the State Reserve Bureau, which manages China's stocks of strategic materials, or through other state companies.

"Such transactions may not be reflected on the central bank's balance sheet," he said.

Green at Standard Chartered speculated that the bank had indeed already been buying surreptitiously.

He said the markets were awash with rumors that the central bank's gold holdings were much greater than the published total, which has not changed since the end of 2002.

"It would be very strange if they weren't adding to their pot of gold in the intervening period. But the balance sheet doesn't reflect that," Green said.

"They don't disclose the breakdown of the FX reserves, so if you want to disguise what you're doing in the gold market, then you could simply classify it as an another asset, part of the FX reserves," he added.