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Beijing. China should buy more gold because the dollar is poised for a fall and the metal is needed to support the greater international role envisaged for the yuan, a senior researcher with the ruling Communist Party said on Thursday.

Li Lianzhong, who heads the economic department of the party’s policy research office, said that China should use more of its $1.95 trillion in foreign-exchange reserves to buy energy and natural-resource assets.

At a foreign exchange and gold forum, Li said buying land in the United States was a better option for China than buying US Treasury securities.

“Should we buy gold or US Treasuries?” Li asked. “The US is printing dollars on a massive scale, and in view of that trend, according to the laws of economics, there is no doubt that the dollar will fall. So gold should be a better choice.”

There is no suggestion that Li, even though he is a senior researcher, was enunciating an agreed party line.

However, a debate is swirling in China about how the country can reduce its exposure to the dollar and to US assets in case America’s ultra-loose fiscal and monetary policy rekindles inflation and erodes the value of the dollar and US Treasuries.

To that end, China has said it would buy up to $50 billion worth of bonds denominated in Special Drawing Rights, the International Monetary Fund’s unit of account, to be issued by the IMF.

Chinese companies, at Beijing’s bidding, are snapping up energy and commodity supplies around the globe to fuel its fast-growing growing economy.

Sinopec, China’s largest oil refiner, agreed this week to buy Swiss oil explorer Addax Petroleum for $7.24 billion, in China’s biggest overseas acquisition.

China disclosed on April 24 that it had increased its holdings of gold to 1,054 metric tons from 600 metric tons since 2003.

However, China’s foreign-exchange reserves have grown so fast over the same period that gold’s share of the stockpile, the largest in the world, has shrunk.

Li cited the high share of gold in the foreign-exchange reserves of the United States, Italy, Germany and France, to argue that China’s gold holdings, which account for about 1.6 percent of its reserves, were too small.

China does not disclose the composition of its currency reserves, but bankers assume that about 70 percent of it is held in dollar assets.

China is the largest single holder of US Treasuries, with $763.5 billion at the end of April, according to US Treasury data.

Analysts say that this data set understates the true number, as it does not capture paper bought through dealers in London or elsewhere.

Li said a second reason for buying more gold would be in anticipation of the yuan one day becoming a reserve currency.

The yuan is not convertible on the capital account, meaning it cannot be freely traded for other currencies for financial transactions that are not related to trade.

This rules out the yuan’s use as a global reserve currency, for central banks would not be able to convert it quickly if necessary.

But in a very preliminary step towards that goal, China is paving the way for greater use of the yuan beyond its borders.

The People’s Bank of China has arranged currency swap deals with six countries since December worth 650 billion yuan ($95 billion), so that trade and investment with China can be conducted in yuan, not dollars.

And China will soon allow selected firms in the southern province of Guangdong that trade with Hong Kong to settle their transactions in yuan.

“If the yuan should go international or become a reserve currency, China needs more gold to back that,” Li said.

When the yuan does become an international currency, which Li acknowledged was a long way off, he said the composition of the SDR should be reformed to include the Chinese currency.

Ideally, in the long term, the SDR would be made up of the dollar, euro, sterling and yen and yuan, each with a weighting of 20 percent, Li said.

The SDR is made up of the dollar, with a weighting of 44 percent; the euro, with 34 percent; the yen, with 11 percent; and the British pound, with 11 percent.

The four currencies in the SDR, which must be convertible, are those issued by IMF members with the largest share of global trade. The weights assigned by the IMF are based on the value of exports and the amount of reserves denominated in those currencies.



Reuters