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Tuesday, August 25, 2015

China Begins to Report Their Gold Reserves Monthly, But Are They Massively Understated?

Beginning in the last month, China has begun to report their gold reserves monthly. But with many questioning the accuracy of the numbers, what could be China’s ultimate goal? Find out here.

Most countries report their gold holdings to the International Monetary Fund (IMF) on a monthly basis. Until recently, China was among the few who elected not to do so, having created no such reports in six years.

But within the past month, that has changed. Now, they seem to have adopted the monthly report system in an effort to get in the IMF's favor and thus increase the chances of the yuan being included in the Special Drawing Rights (SDR) basket.

China hasn't just been criticized about the lack of reserves reports. Their first report after six years was met with widespread disbelief, as most analysts estimated that their holdings were high above the 'official' figure of 1,658 tons. It would be strange for China to have such small reserves considering how they view the metal. While the West recognizes the value of gold, many Asian countries – with China perhaps at the forefront – go a step further and see it as the ultimate money.

At any rate, Lawrence Williams finds the way China reports their gold reserves to be in stark contrast with how the West does it. Whereas Western countries will inflate their reserves by including leased and swapped gold in the figures, China seems to be hugely understating their holdings by using “non-reportable” government-controlled accounts.

Williams writes, “It also seems to be the situation that in China, a very substantial gold holding – far above the currently stated ‘official’ figure – is considered to be a prerequisite for attaining a stronger position for the yuan in global trade.” Despite this, it seems as though China prefers to avoid “rocking the U.S. economic boat” with a report of massive reserves – at least for the time being. But what happens once the yuan finds its way into the SDR basket is anyone's guess. After all, Williams does point out that Chinese gold holdings “magically” increased by 600 tons from 2009 to 2015.

Aside from frequent holdings reports, China is also devaluing the yuan in response to the IMF's recent criticism. Yet should the IMF delay the yuan's inclusion for too long in spite of China's efforts, Williams notes that the Chinese could see this as an unfriendly act and respond accordingly by trying to destabilize the U.S.' global position using their forex holdings.

While the time might not yet be right, Williams warns that “the game could change” should China's plans of joining the SDR be thwarted. “China thinks long term in a way the West mostly does not. It may lose the odd battle but ultimately aims to win the economic war,” he says.

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