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The mainland is seriously considering a plan to diversify more of its massive foreign-exchange reserves into gold, a person familiar with the situation told the Hong Kong Standard.
Beijing is considering changing its asset allocations during the financial tsunami in order to build up gold reserves "in a big way," the source said.
China's fears about the long-term viability of parking most of its reserves in the US government bonds were triggered by Treasury Secretary Henry Paulson's US$700 billion (HK$46 trillion) bailout plan, which may make the US budget deficit balloon to well over US$1 trillion this fiscal year.
The US government will fund the bailout by printing new money or issuing huge amounts of new debt, either of which will put severe pressure on the value of the greenback and on government bond yields. The United States holds 8,433.5 tonnes of gold reserves valued at US$188.23 bullion. China holds gold reserves of just 600 tonnes, worth only US$13.89 billion. Beijing's reserves could easily go up 3,000 to 4,000 tonnes, Talrich Futures senior vice-president Colleen Chow Yin-shan said.
Until now, the United States has had little choice but to issue massive amounts of debt to fund its deficits, and China has had little choice but to purchase it as there are not many markets deep enough to absorb the mainland's US$30 billion to US$40 billion in monthly capital inflows.
Government officials involved in the management of China's reserves are beginning to see gold as an attractive place to park some of those funds. They see it as a real, tangible asset that will not lose its value over time— in stark contrast to the greenback, which is becoming more disconnected from economic realities as more bills are printed.