China courts foreign gold reserves to boost global clout

Demand from central banks has been a key pillar in the precious metal’s recent ascent to record highs, and the PBOC itself has been on a buying spree for ten straight months.

Spot gold rose as much as 1.2% to a fresh record after the news, before easing slightly to $3,784.74 an ounce as of 9:42 a.m. New York time.
“Markets may be speculating that China’s bid to host foreign gold reserves signals a long-term push to elevate its role in the global monetary system,” said Wael Makarem, financial markets strategists lead at Exness. “Investors could be interpreting this as incremental de-dollarization momentum, which could support gold.”

The reserves would be held in custodian warehouses linked to the SGE’s International Board, which falls under the PBOC and was set up by the central bank in 2014 as the main venue for foreigners to trade gold with Chinese counterparts. The bullion would be made up of new purchases that count toward the foreign country’s reserves, rather than being relocated from existing stockpiles, the people said.

While China’s move marks another step toward building its role in global bullion trading, it remains some way from challenging established hubs such as the UK. The Bank of England’s vaults hold over 5,000 tons of the world’s reserves, worth nearly $600 billion and anchoring the city’s role as the leading marketplace for the precious metal. Custodian services, which safeguard assets on behalf of clients, are key for a gold center, helping to boost credibility and attract more trading.

The PBOC’s reported reserves are less than half that, putting it at No. 5 in the global ranking of central bank holders, according to the World Gold Council. However, China’s domestic market for gold, whether as jewelry or in bars and coins for investment, is the world’s largest.

Boosting local trading even further should help Beijing accelerate its campaign to reduce reliance on the dollar and internationalize the yuan. Bullion has nearly doubled in value to over $3,700 an ounce in the past two years, and recently eclipsed its inflation-adjusted record set in 1980. The blistering rally may have more room to run, with Goldman Sachs Group Inc. predicting it could hit $5,000 if just 1% of privately-held Treasury holdings shifted to gold.

China has already taken a number of steps to open up its gold market. The SGE launched its first offshore vault and contracts in Hong Kong this year, a move designed to increase transaction volumes in the yuan. The PBOC has also recently eased restrictions on gold imports.

For prospective clients, Chinese vaults could be an attractive option to build reserves and help bypass the risk of being cut off from the world’s financial markets. Central bank buying of gold accelerated after the US and its allies froze Russia’s foreign exchange reserves in 2022 after the invasion of Ukraine.

But there are trade-offs, too. “If countries chose to store their gold in China, they will forgo the ease and liquidity in London,” said Nicholas Frappell, Head of Institutional Market at ABC Refinery.