China’s Central Bank Increases Gold Holdings to Prepare for US Sanctions: Analysts

Gold bullion bars in bank vault storage. Corona Borealis Studio/Shutterstock

For the past five months, China’s central bank has been increasing its gold reserves while simultaneously decreasing its holdings of U.S. bonds. Industry experts believe that this move is in anticipation of future sanctions that China may face.

According to data recently released by China’s State Administration of Foreign Exchange and reported by financial news outlet Caixin, in the three years between September 2019 and October 2022, China’s gold reserves remained unchanged.

Starting in late 2022, however, China began bulking up its gold reserves. Between November 2022 and March of this year, China accumulated 3.86 million ounces (about 120 tons) of gold.

Moreover, from the end of February to the end of March, the country’s gold reserves increased by 580,000 ounces (18 tons) to reach 66.5 million ounces (2,078 tons).

Fear of Sanctions

According to China scholar and finance author Sun Xiaoji, the Chinese central bank is actively increasing its gold holdings as it anticipates the possibility of being excluded from the global U.S. dollar payments system.

China fears U.S. sanctions that would restrict it from Western financial networks and the dollar, as happened to Russia after Vladimir Putin’s invasion of Ukraine, Sun said on his YouTube program on April 9.

China’s Ministry of Finance convened an emergency meeting on April 22 of last year to discuss the potential impact of international sanctions on the country’s overseas assets, the Financial Times reported. The meeting was prompted by concerns that in the event of a military attack on Taiwan, China could face similar sanctions to those imposed on Russia. It included officials from China’s central bank and finance ministry and executives from local and international banks, the report said.

As U.S.–China relations continue to deteriorate, the Chinese central bank has been buying gold at a rapid pace, with the total reported amount now exceeding 2,000 tons, making it the sixth-largest gold reserve in the world, Sun said.

“Domestically, the Chinese Communist Party (CCP) advertises that it is ‘proactively challenging the United States and de-dollarizing,’ but the real reason is that it knows it will be sanctioned by the United States sooner or later. Therefore it is looking for an alternative to the U.S. dollar, and the only alternative is gold,” Sun explained.

At the same time, China’s central bank is selling off U.S. bonds.

According to economic data analyst CEIC, Chinese communist authorities reduced their holdings of U.S. Treasuries for the sixth consecutive month, to $859.4 billion by the end of January. It was also the tenth consecutive month that China’s U.S. debt holdings fell below $1 trillion.

Compared to the end of January last year, when the country’s U.S. Treasurys holding was at $1,054.8 billion, the decrease was nearly 20 percent year on year.

According to calculations by Federal Reserve economists Carol Bertaut and Ruth Judson, reported by Reuters in February, Chinese communist authorities dramatically decreased their holdings of U.S. Treasuries, by $173.85 billion in 2022. This represents the second-largest annual reduction in U.S. bond holdings, following their $189 billion reduction in 2016.

A Chinese ‘Counter-Attack’

Chinese media has claimed that the active reduction of U.S. debt holdings is the Chinese authorities’ counter-attack against the U.S. dollar, because of U.S. sanctions and restrictive measures against Huawei and SMIC, among others. An April 11 article on Chinese news portal Netease says the strategy is a way to “effectively fight back” and adds “there is no room for discussion.”

In an April 13 interview with The Epoch Times, Fang Qi, a UK-based financial consultant, said that he believes that the CCP’s central bank has reduced its holdings of U.S. bonds and increased its gold reserves mainly out of concern for rates of return and reducing volatility, although the CCP’s domestic propaganda will certainly describe it as an initiative to combat the United States.

In fact, China’s foreign exchange reserves remain largely invested in U.S. dollar bonds, as they offer the optimal combination of safety, liquidity, and rate of return, making them the most suitable investment option, Fang said.

According to official data (pdf), China remains the world’s second-largest holder of U.S. bonds after Japan as of the end of January this year.

BRICS Countries Talk De-Dollarization

Meanwhile, the media has been reporting on the trend of de-dollarization in the BRICS countries: Brazil, Russia, India, China, and South Africa. Brazil’s president has called for BRICS countries to adopt an alternate currency to the dollar. India is willing to settle trade with Russia in the currency of the United Arab Emirates. Brazil is in talks with Argentina on a common currency that would reduce the two countries’ reliance on the dollar. China and Russia have expanded trade in the yuan following U.S. sanctions on Russia.

Finally, South African foreign minister Naledi Pandoor told Russian state news agency Sputnik in January, “We have always been concerned by the fact that there is a dominance of the dollar and that we do need to look at [an] alternative.”

According to Sun, the reason for de-dollarization among the BRICS countries is not that China and Russia have decided to proactively abandon the U.S. dollar. He feels the underlying reason is that the recent wave of globalization has come to an end. The world is about to enter a stage of regional development or even regional confrontation, Sun said.