Can we trust China’s gold reserve figures?

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According to a Reuters report, China’s Ministry for Industry and Information Technology has put out a statement suggesting that the country’s gold output will continue to rise over the next three years to reach between 420 and 450 tonnes per annum, thus comfortably retaining its position as the world’s largest gold producer.  It also predicts Chinese consumption of some 1,000 tonnes of gold per annum by then.

(Charts courtesy of Nick Laird at goldchartsrus).

But how accurate are these figures?

Particularly with regard to consumption?  China may, or may not be the world’s largest consumer of gold this year.  It and India vie for first place. But with the Indian government trying to dampen down demand for physical gold imports as a means of trying to help curb its annual trade deficit, while China seems to consume more and more each year, if China doesn’t become the world’s largest gold consumer this year it can’t be long before it achieves this position.

China Gold Production 1970 -2020

What the big unknowns are with these figures is firstly how much of China’s gold demand is from the general public and how much, if any, is wending its way into official reserves even though this may remain unreported.  China already has a track record of not reporting its full official gold holdings until it thinks it appropriate to do so, but given that this is the case is there any certainty that even these figures are accurate?

Secondly, how accurate are the gold import figures in the first place.  Hong Kong is believed to report accurately the amount of gold which flows through it, but are there other routes? And if so, how much comes in by such other routes? How much gold also is generated from smelting and refining foreign ores and concentrates and is this reported in annual Chinese output, or is this another element of effectively unreported imports?

Like much of the announced gold sector statistics, not only from China, but from the West as well, how much data is manipulated for overtly political ends?  Governments, and by association Central Banks, are widely known to manipulate data, so why not gold statistics?  After all, gold is seen as a determinant of true currency values and governments like to present their data in the best possible light.  I don’t think anyone truly believes official inflation and cost of living statistics as presented by supposedly open governments, so how much easier is it to not believe those countries which exert a high degree of state control in normal life.  Or indeed is there any government anywhere in the world that does not massage and manipulate official figures to suit its own political agenda.

Central Bank Gold Reserves by Country between 2005 and 2014

The general public is beginning to question government and Central bank figures to a degree not seen in the past, as witness the pressure on Germany’s Bundesbank to audit its gold reserves held in vaults in other countries, notably in the USA and the UK – a pressure which is finding similar support in other European democratic nations. Indeed, recent scandals in the financial sector casts yet more doubt on the veracity of much of the information reported by government and banks that has been totally accepted by the general public in the past.  A recent survey by Which magazine in the U.K. has come up with the startling fact that one of the country’s best known financial institutions – a major high street and global bank nonetheless- is the least trusted brand name in the U.K.  Not so long ago your friendly local bank manager would have been considered as being perhaps the most upright citizen in the town, at the peak of propriety.  Now the banks are considered among the least respected of all the professions.  How the mighty have fallen!

Maybe the Bundesbank’s and all the other nations’ gold stored in the vaults in New York and London is indeed all there, but the very fact that this is being questioned at all signifies a basic, all-pervading reduction in trust in any kind of financial institution – and almost certainly in government too – politicians have long been considered by many as just opportunists out to feather their own nests.

Now this is all somewhat of a digression from the initial premise of this article regarding China’s gold imports, production and consumption.  We don’t necessarily believe the Chinese figures at face value, yet at least the country has gone on record in the past in saying yes, we have been reporting our gold reserves at such and such a level, but have been quietly adding to them in another unreported account which we are now announcing as part of our official reserve figure – as it did in 2009.  This may actually be a more honest presentation of the facts than those released by governments of many western democracies who are also known to have manipulated and massaged figures in the past without ever admitting that they have been doing so.

China’s gold production this year is heading for around 390 tonnes plus, around 10% higher than in 2019. However, some have speculated that China’s entire mined production is being taken into state coffers, while the imports are being used to satisfy general consumer demand.  If this is indeed so, China’s reserves could possibly have grown to around 2,000 tonnes by the end of the current year, and could rise to comfortably over 3,000 by 2022 – on target to rival Germany as the world’s second largest holder of the yellow metal after the U.S. – but in China’s case gold would still only account for a small fraction (around 5%) of its total ‘currency’ reserves whereas for the other big gold holders, the USA, Germany, Italy and France gold accounts for over 70% of reserves. 

We have stated here before that China’s long-term aim is for the yuan to become the world’s principal global reserve currency, but it feels it needs the gold backing to accomplish this.  While it is perhaps unlikely to match the big gold holders in percentage of reserve terms, it is not outside the bounds of possibility that it could become the world’s biggest accumulator of gold in reserves by the end of the decade and would use this as leverage to consolidate its position as the dominant force in world trade.

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