economics

March 15, 2010

Beijing Cools to Gold, Reassures on Treasurys

Filed under: Uncategorized — ktetaichinh @ 10:49 pm
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BEIJING—China’s chief foreign-exchange regulator suggested the country’s appetite for further gold purchases may be limited and offered soothing words about China’s role as an investor in U.S. Treasurys.

“Gold is not a bad asset, but currently a few factors limit our ability to increase foreign-exchange investment in gold,” said Yi Gang, director of China’s State Administration of Foreign Exchange. He said gold doesn’t offer good long-term returns because of price swings.

China rarely reveals its thinking on investment of its foreign-exchange reserves, which at $2.4 trillion are the world’s largest. The issue of its gold holdings has been highlighted since the global financial crisis, as the dollar’s movements have prompted academics and officials outside SAFE to recommend more diversification of China’s reserves.

Mr. Yi, at a news conference during the National People’s Congress, the annual legislative session, said that while China’s gold reserves, at 1,054 metric tons, are the fifth-largest in the world, the holdings, at current prices, are only a small part of its foreign-exchange reserves. Based on data on holdings at the end of last year, gold represented about 1.5% of China’s foreign-exchange reserves at current prices.

Amid continuing jitters about Beijing’s appetite for U.S. debt, Mr. Yi also said China holding Treasurys can be mutually beneficial for China and the U.S. China buys and sells U.S. Treasurys on a daily basis and Beijing doesn’t want such trading to be politicized, Mr. Yi said. He reiterated that China will be a “responsible investor” in Treasurys.

Mr. Yi said the past 30 years have shown that the return on gold hasn’t been great and that given China’s heft as a gold buyer, any move it makes to purchase the precious metal would “certainly” increase gold prices.

China’s gold holdings are widely watched. In April 2009, gold prices rallied when China suddenly acknowledged its gold reserves had risen by 454 metric tons since 2003, to 1,054 tons. Last month, gold prices swung briefly again on an inaccurate report on a little-known Web site that said China was in talks to buy gold from the International Monetary Fund.

China is the world’s largest producer of gold and the second-largest consumer behind India, based on data from the World Gold Council. Its annual gold output is about 300 tons, and it consumes about 400 tons on an annual basis, Mr. Yi said. Private holdings of gold by Chinese individuals have been estimated at more than 3,000 tons, he said.

Mr. Yi’s remarkshad little effect on Tuesday spot trading of gold, which fell $1.60 to $1,122 an ounce in New York.

“The market is sensitive to what China plans for its reserves. But gold is quiet, and nobody really expects China to announce their plans,” says Anderson Cheung, director of precious metals at Mitsui in Hong Kong.

Mr. Yi, a vice governor of the People’s Bank of China, acknowledged that China is studying whether to inject more capital into China Investment Corp., its $300 billion sovereign-wealth fund, but said Beijing aims to let private investors play a larger role in overseas investment.

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