Last year, China imported and mined far more gold than its citizens and businesses purchased. Some think there was substantial back-channel hoarding of the metal due to uneasiness over the economy while others speculate that the People’s Bank of China , the central bank, secretly acquired the metal for its foreign reserves. A few believers of the second scenario argue that Beijing will attack the dollar by soon announcing a new gold-backed currency.
This month, the China Gold Association released data showing that the country’s consumption of the yellow metal in 2013 reached 1,176.4 metric tons, an increase of 41.4% over 2012. Yet that tonnage is far less than the total of mine production—428.2 tons—and imports from Hong Kong, 1,158.2 tons. The discrepancy: 410.0 tons.
As large as that number is, the real gap was undoubtedly bigger. Beijing does not publish gold trade statistics, and there are substantial volumes entering the country unrecorded, through Shanghai and gray routes, with both the government and the wealthy bypassing established channels. Analysts, in short, believe China’s “apparent gold consumption” last year was over 1,700 tons, making the unaccounted gold more than 500 tons.
So where did all that metal go? Some was used for jewelry that was exported. Bars may have been delivered to Iran to surreptitiously pay for oil and gas. Gold could have been lost in the complicated and opaque accounting system maintained by the Shanghai Gold Exchange. A small amount was acquired by wealthy—and nervous—Chinese in off-the-books transactions. Banks were buying for their own accounts.
And then there is the possibility of secret central bank purchases. Zhang Jianhua, a PBOC official, in December 2011 talked about the institution buying on price dips. Despite Zhang’s public words, there were reasons to believe the central bank was not in the market then, at least not in a big way.
In 2013, however, the PBOC may have changed its stance and become a large purchaser. The price of gold, which had steadily climbed from 2001 to 2012, plunged last year, falling about 28% and creating a buying opportunity for the cashed-up central bank. China’s gold reserves now stand at 1,054 tons, an official number not updated since April 2009, and most analysts suspect there has been unannounced buying.
Speculation about secret gold purchases gives credence to recent rumors, circulating in big financial houses in New York, that Beijing will soon move to full convertibility of its currency and adopt the gold standard. The rumors got a boost when Freya Beamish of Lombard Street Research issued a note on February 12 referring to the issue. “The massive flow of gold into the country does make it seem plausible that they could be moving in the direction of using gold in the effort to internationalize the currency and escape what is seen as a domineering dollar,” she wrote.
The yuan, as the renminbi is informally known, became convertible on the current account in December 1996. Since then, Beijing has failed, despite official promises to do so, to take the next big step, to make it convertible on the capital account. Yet there are now compelling reasons for Chinese authorities, in some dramatic fashion, to restructure the country’s money.