Mainland China Continues to Increase Gold Reserves While Continuing to Reduce US Treasuries

The latest March foreign exchange reserve data released by the People’s Bank of China shows that the People’s Republic of China 🇨🇳 has increased its gold holdings for five consecutive months, accumulating an additional 120 tons of gold and raising its gold holdings to about 2,068 tons, an increase of 0.9% over the end of February.

This is seen as the result of the mainland Chinese government promoting gold reserves as a safe asset, and also a reaction to financial turmoil and rising prices in Europe and America.

This trend is nothing new. Between December 2018 and September 2019, mainland China had carried out an action to increase its gold holdings, adding 106 tons. But this time the five-month increase exceeded that of the previous period, and at a faster pace.

Some analysts believe that mainland China’s continued increase in gold holdings is intended to reduce its dependence on the US dollar. As US interest rate hikes caused bond prices to fall, the mainland Chinese government has also been reducing its holdings of US Treasuries. According to data from the US Federal Reserve (FRB), at the end of March the US dollar index against major currencies had fallen 1.9% from the end of February.

Of foreign holdings of US Treasuries, 40% comes from Japan and mainland China. But the latter is accelerating its pace of breaking away from the US dollar, which also explains why mainland China’s holdings of US Treasuries fell to 870 billion US dollars, hitting a 13-year low.

As mainland China continues to increase its gold holdings, this will have a certain impact on the financial markets. First, it will raise the demand for and price of gold, and may encourage other countries and investors to start increasing their gold holdings as well. Second, it will reduce the US Treasuries held by mainland China’s central bank, which may cause the price of US Treasuries to fall and affect the US economy.

In short, mainland China’s central bank has increased its gold holdings for five consecutive months and accelerated the reduction of US Treasuries, indicating that the mainland Chinese government is strengthening its break away from the US dollar. This will have an impact on global financial markets, especially the gold and US Treasury markets.