CHINA should create funds to invest some if its $3 trillion of foreign exchange reserves in non-currency assets – including Buying Gold – a leading analyst believes.
Dong Tao, Hong Kong-based economist at Credit Suisse, says China could put up to 10% of its foreign exchange reserves into each asset class it targets.
"From the point of view of investment structure, should funds be set up to invest in energy and precious metals in the next 30 to 50 years? Absolutely," he said. "With $3 trillion, China should invest in every possible asset. It can probably put $200 billion to $300 billion in each."
China's foreign exchange reserves have grown rapidly in recent years. In April 2003 they stood at an estimated $326 billion – just over a tenth of today's level. Zhou Xiaochuan, governor of the People's Bank of China (PBOC), China's central bank, told a monetary conference last month that "foreign-exchange reserves have exceeded the reasonable level that our country actually needs.”
Caixin Media, a Beijing-based financial media group, reported last week that the PBOC is actively considering creating what an official source called "specialized foreign exchange reserve investment funds". It would potentially model them on the Norges Bank Investment Management (NBIM), which manages Norway's sovereign wealth.
Caixin reported that "China's central bank and the Norwegian central bank communicate a lot" and that "Governor Zhou has also visited Norway," according to its central bank source.
However, the size of China's reserves means it may find Buying Gold and other assets difficult, as its actions would have a sizeable impact on markets.
"Some have argued that we should buy oil, Buy Gold, buy iron ore, or even buy into companies and land. But it is much easier said than done," said Yi Gang, head of China's State Administration of Foreign Exchange (SAFE).
Latest figures from the World Gold Council show that China's official gold holdings amount to 1054.1 tonnes, or 1.6% of its reserves. Calculations by BullionVault suggest that in order to hold 10% of its reserves in gold, China would need to buy around 5500 tonnes of additional bullion, based on current Gold Prices.
By comparison, global Gold Mining production in 2010 totaled 2689 tonnes, according to GFMS, the leading precious metals consultancy.
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