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Why China is buying so much Gold?

Why China is buying so much Gold?

Gold prices in almost all developing and developed nations was touching an all-time high. One of the main reasons behind it was China was hedging its currency against gold. China was buying more and more gold from the world.

The market hit a record $2,449.89 per ounce on 20th May 2024, driven by interest rate cut expectations and firm central bank buying, fuelled by geopolitical tensions. Precisely for this rising market prices that have an immediate impact on the economy and individual investment why we should know about China’s gold purchase. This analytical piece is dedicated to exploring the reasons behind this step.

Real estate crisis in China is pushing youngsters to invest more in gold due to less choice available in their market. However, the biggest buyer of gold is the central bank. The People’s Bank of China (PBOC) controls the amount of gold entering China via quotas to commercial banks. It was the largest official sector buyer of gold in 2023, with net purchases of 7.23 million ounces, or 224.9 metric tons, according to the World Gold Council (WGC), the most for any year since at least 1977.

The industry body calculated China’s purchases of the precious metal last year at 225 metric tons, roughly a quarter of the 1,037 tons bought by all the world’s central banks.

The probable reasons why China is purchasing gold in ample amount can be:

1. Exploring and expanding Clean Energy Security

China has been working consistently on solar energy, its installed solar electric power generation capacity rose by 55.2% in 2023. The country built in excess of 216 gigawatts (GW) of solar power this year. This expansion can also be witnessed in terms of its production and international supply. According to China Photovoltaic Industry Association data, at the end of 2023, China’s annual production capacity for finished solar modules was 861 gigawatts (GW) equivalent more than double global module installations of 390 GW. Nearly half of China’s solar panel exports in 2023 were to Europe. Further, Oversupply pushed prices of finished solar panels in China down 42% in 2023, making Chinese panels more than 60% cheaper than U.S.-made equipment. The research on solar energy is evolving and some of the prominent researches are pointing out towards gold. Some of the examples are:

  • Silver is a necessary component of today’s solar panels. However, the solution developed by Stanford’s researchers uses gold’s extreme malleability and electrical conductivity to get around the limitations of regular wiring. Hence it is possible that solar panels in the near future may incorporate gold to improve performance and efficiency.
  • In August 2018, researchers from Hokkaido University in Japan studied the efficiency of gold solar cells. Professor Hiroaki Misawa led the experiment, which combined two layers of gold film surrounding a microscopic semiconductor. The layers trap the light, and the gold films work as mirrors, trapping more light than a silicon solar cell would. This allows the nanoparticles to absorb 11 times more sunlight than in a typical cell. Professor Misawa’s team found that the gold cells’ efficiency was a whopping 85% making this a groundbreaking discovery for the solar industry and clean energy revolution.

2. Hedging Against Currency Risk

By growing its gold reserves, China is seeking to protect its economy from the inescapability of fiat currencies’ volatility, in particular the U.S. dollar.

  • Since the U.S. dollar can be highly volatile due to a lot of economic and political factors, holding gold will make China diversify its reserves from asset domination by the U.S. dollar.
  • In fact, the intrinsic value remained in force regardless of the circumstances, especially in the current situation of hyperinflation. With more gold in stock, China could protect itself from the erosive effects on the value of its reserves through inflation.

3. Strengthening the Renminbi

That work of accumulating large gold reserves would make the RMB more credible and stable and would support its internationalization.

  • A large volume of gold reserves is quite crucial when international markets and investors require confidence in the robustness and stability of the RMB as a key necessity for China to consider making the RMB an international reserve currency.
  • Gold acts as a buffer during times of economic crisis or instability of markets, thus making RMB stable. Therefore, the currency becomes more attractive for international transactions and reserves.

4. Geopolitical reasons

In fact, the strategy of accumulation by China also responds to geopolitical purposes with respect to reducing dependence on the dollar and, thereby, the option to lose the economy under its politics or other U.S. sanctions.

  • An increase in gold will help to reduce the dependency of China on U.S. dollar-denominated assets and the global financial systems that are U.S.-dominated. These will be strategic with the current tensions and trade disputes discouraging hegemonic influence from the U.S.
  • In such cases of geopolitical conflict, where countries are imposing sanctions on each other, gold provides this sanctioned good for international trade and financial transactions without such restrictions of other countries.

5. Strategic International Position

Being one of the largest holders of gold, China can influence what happens with global gold prices and market dynamics, making it strategic leverage for the country in the global economy. Big gold reserves are a big factor in furthering China’s intention of making the RMB a major international reserve currency. A currency strong perception with gold backing will also attract other countries to keep the RMB in their reserves, enhancing the global economic influence of China.

Gold accumulation is just another strategy for gaining economic stability and reducing dependency on the dollar, further giving more credibility and internationalization of the RMB. All these are long-term strategic goals increasing the country’s global influence.

Dhruv Kumar Singla

Dhruv Kumar Singla is Graduation Student at Gokhale Institute of Politics and Economics with a keen interest in Finance and Investment. He has been working upon research projects in the same area.

Vaibhavi Pingale

Ms. Vaibhavi Pingale is a Visiting Faculty of Economics at Gokhale Institute of Politics and Economics, Pune & at Savitribai Phule Pune University. She is pursuing her PhD. She has been actively writing media articles other than academic research.

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