The Case Of China’s Missing Gold

Following China's official revelation on Friday that, for the first time since April 2009, it increased its gold holdings by "only" over 600 tons - supposedly in one month, which goes without saying is impossible and confirms how even the PBOC not only cooks its books but is willing to confirm that it does so - many have sprung to ask: what is really going on behind the scenes at the central bank which even Bloomberg's conservative estimates saw its gold tripling to over 3,510 tons.

Perhaps the answer is very simple: while many assume that the only reason China revealed (some of) its latest gold holdings is to further bolster its case for admission into the IMF's Special Drawing Right, the real reason why the PBOC may have resorted to telegraph to the world that it has much more gold is simply to prop up its markets.


Recall what little-noticed quote Reuters cited on July 3, just as Chinese stocks were plummeting 7% on a daily basis, with index futures halted limit down, and half of Chinese stocks halted from trading:

The Shanghai Composite Index plummeted more than 7 percent at one point in early trade. It ended the morning session down 3.3 percent at 3.785.6 points, heading for a weekly loss of nearly 10 percent. "This is a stock disaster. If it's not, what is it?" said Fu Xuejun, strategist at Huarong Securities Co.


"The government must rescue the market, not with empty words, but with real silver and gold," he said, saying a full-blown market crash would endanger the banking system, hit consumption and trigger social instability.

Perhaps all the PBOC did was take Fu's advice, and gently pull the curtain on what its true holdings are for no other reason than to restore confidence in its balance sheet and from there, to stabilize the market.

Incidentally, this is precisely what we said on Friday when the PBOC stunner hit the wires. Recall what China SAFE's official explanation was for the unexpected revelation:

Gold as a special asset, with multiple attributes financial and commodities, together with other assets to help regulate and optimize the overall risk-return characteristics of international reserves portfolio. From the perspective of long-term and strategic perspective, if necessary, dynamically adjusted international reserves portfolio allocation, safety, liquidity and increasing the value of international reserve assets.

And as we further noted "China had to wait until its stock market was crashing to present the "systemic stability" bazooka: gold. Because in revealing a surge in its gold holdings, the PBOC is hoping to finally provide that final missing link that will boost investor sentiment, and get people buying stocks all over again."

And now that the seal has been finally broken after so many years, and since today's update indicates that Chinese gold numbers are clearly goal-seeked with a specific policy purpose - to boost confidence - we await for the PBOC to start leaking incremental gold holding data every month (and especially in months when the market crashes) which will bring us ever closer to what China's true gold holdings are.

So perhaps it is a simple case of revealing the PBOC owns more gold than expected simply to preserve some more confidence after engaging in an unprecedented series of "plunge protecting" events few of which have had much success (at least until threats of outright arrests of sellers emerged).

Then another potential explanation was offered by Telegraph's Ambrose Evans-Pritchard who late today quoted Sharps Pixley's analyst Ross Norman as saying that "the level of gold reserves announced by China massively understates the country’s true holdings. “We think they have at least twice as much, maybe even 4,000 tonnes,” he said. "Sharps Pixley said a “seismic change” is under way in the bullion markets as economic power shifts to the East, boosting gold prices over time."

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. This is an internal transaction and is therefore not necessarily recorded in China’s external reserves.

Then AEP goes on to quote David Marsh, from the monetary forum OMFIF, who said "China would risk unsettling the world gold market if it revealed bullion reserves of 2,000 or 3,000 tonnes. This might be interpreted as an unfriendly move against the dollar at a "delicate time."

And from a purely logical standpoint, it would be far more sensible for the PBOC to reveal just a fraction of its gold holdings, whether it was to stabilize its stock market or to boost its chances of SDR admission, than to expose the entire vault, especially if it wanted to buy more: it doesn't take rocket surgery to realize that one can buy more assets for cheaper, if one is not exposed as amassing a huge position in a given asset.

So the next question is if China does indeed have more gold than is represented, and if the PBOC is simply exposing its holdings one month at a time for whatever reason (especially since we know the PBOC did not buy 600+ tons in the month of June), then where is this gold "hidden" or, rather, where did all of China's gold - the thousands of tons both mined domestically and imported over the past five years - go?

One answer is presented by Louis Cammarasno in the following Smaulgld blog post:

"The Case Of China's Missing Gold"

  • The People’s Bank of China Updates Its Gold Reserve Holdings
  • Chinese Gold reserves jump 604 tons from 1,054 tons last reported in 2009 to 1,658 tons.
  • Many gold observers ask – ‘Is that it’?
  • Since 2009 China has mined over 2,000 tons of gold and imported over 3,300 tons of gold through Hong Kong*.
  • Where did it all go?

The Case of China’s Missing Gold

On July 17, 2015, the People’s Bank of China (PBOC) updated its gold reserves holdings for the first time since 2009. The PBOC reported adding 604 tons of gold to their reserves bringing the total from 1,054 tons to 1,658 tons.

The PBOC announcement was widely anticipated as a pre-requisite of China’s application for inclusion in the International Monetary Funds’ (IMF) Special Drawing Rights (“SDRs”).

China’s announced gold reserves are a respectible amount, but far lower than what many gold observers believe China has.

1,658 Tons of Gold – Good Enough For the IMF?

Having large gold reserves are not required to be in the SDR. England is in the SDR and has just over 310 tons of gold.

We have argued that China’s primary objective is not acceptance into the SDR but rather to establish a viable parallel international financial structure to rival the IMF.

We think China holds a portion of its gold at the PBOC as reserves with the rest held elsewhere in China.

The PBOC’s updated gold reserves are five times more than England’s and certainly enough to show the financial heft required for admission to the SDR. The PBOC doesn’t need to report thousands of tons of gold to get into the SDR and they don’t need to upstage their largest single country trading partner, the United States at this point (whose stated gold reserves are 8,135 tons).

China’s recent update to its gold holdings put it in fifth place among gold holding nations.

How China Reported The Update to its Gold Reserves

The PBOC’s addition of more than 600 tons of gold to their reserves showed up as a single entry in June 2015!

Unlike Russia that reports increases in its gold reserves monthly (that we catalogue here), the PBOC chose to include all of the increase in its gold reserves since 2009 in just one month.

The People’s Bank of China supposedly added 1,943,000 ounces of gold (approx 600 tons) to its reserves in June.

How Much Gold is There in China?

The additional amount of gold that the PBOC reported doesn’t seem to square with publically available reports on the amount of Chinese gold production and imports.

Chinese Mining Production

China is now the world’s largest gold mining nation and exports virtually none of it.

China has produced over 2,000 tons of gold since 2009.

Chinese Mining Reserves

There’s plenty more where that came from!

On June 25, 2015, Zhang Bignan Chairman and Secretary General of the China Gold Association presented this slide at London Bullion Market forum indicating that China’s gold mining reserves were approximately 9,800 tons.

According to the Chairman and Secretary General of the China Gold Association, China has over 9,800 tons of gold in mining reserves.

Chinese Gold Imports

China has also ramped up its gold imports significaly since 2009. From 2010 to May 2015 net Chinese gold imports through Hong Kong were well over 3,300 tons.

Chinese gold imports through Hong Kong have amounted to over 3,300 tons since 2009.

*China also imports an undisclosed, but large amount of gold through Shanghai.

Chinese Gold Trading on the Shanghai Gold Exchange

In addition to massive gold production and imports, China also operates the Shanghai Gold Exchange (SGE) a major physical gold trading hub. Withdrawals of physical gold on the SGE to date in 2015 are well over 1,200 tons and over 9,000 tons since January 2009.

Withdrawals of physical gold on the Shanghai Gold Exchange are well over 1,200 tons year to date in 2015.

Who’s Got the Chinese Gold?

If Chinese gold mining production and imports through Hong Kong and Shanghai don’t end up at the PBOC, where is it?

The Chinese People

A good portion of Chinese gold is with its citizens. The famed gold crazed “Da Ma” or Chinese housewives who buy any dip in gold prices supposedly hold a good portion of the nation’s gold. Some estimate that Chinese citizens hold thousands of tons of gold. One estimate claims Chinese citizens hold 6,000 tons of gold.

Chinese State Owned Banks

Perhaps another chunk of the Chinese nation’s gold is held in other state owned banks, not necessarily with the PBOC, such as the Agricultural Bank of China, Bank of China, China Construction Bank, China Development Bank and Industrial and Commerical Bank of China all located, like the PBOC, in Beijing, China.

Chinese Sovereign Wealth Fund

The China Investment Corporation (CIC), also located in Bejiing, is a sovereign wealth fund responsible for managing part of the People’s Republic of China’s foreign exchange reserves. The CIC has $746.7 billion in assets under management and reports to the State Council of the People’s Republic of China.

Off Balance Sheet Accounting?

The CIC lists $225.321 billion in finacial assets and about $3.130 billion of “other assets” on its balance sheet. It’s possible that some of these “assets” are in the form of gold.

The CIC has three subsidiaries: CIC International (responsible for internatonal equity and bond investments), CIC Capital (direct investments) and Central Huijin (equity investments in Chinese state owned financial institutions and state owned enterprises).

Central Huijin owns significant equity stakes in each of: Agricultural Bank of China (40.28%), Bank of China (65.52%), China Construction Bank(57.26%), China Development Bank (47.63%) and Industrial and Commerical Bank of China (35.12%).

For a gold backed Chinese Remnimbi 1,658 tons of gold reserves are insufficient, but for admission to the SDR are perfectly adequate.

If indeed China holds gold with the CIC and/or with any of the Chinese state owned banks, the PBOC could roll up that gold on to its own balance sheet in order to show more gold reserves quickly and easily in one month with a single entry.