Why does Bank of China stop buying gold?

Gold prices have skyrocketed to New High, pulling the “Bank of China” from buying gold reserves for the first time in 18 months. China’s central bank held a gold bar of 72.80 million troy ounces in May 2024. Today, ACU Pay will tell you why the Bank of China stopped buying gold and what the future price of gold will be.

The Bank of China stopped stockpiling gold

According to foreign media, the reason why gold prices fell sharply on Friday, 7 June is that the People’s Bank of China (PBOC) suspended gold purchases to reserve funds in May after 18 consecutive months of buying, making spot gold hit a record high in May. This is because during that time of the incident, gold was boosted as a safe haven amid geopolitical concerns and economic uncertainties, and when the news was reported, gold was sold lower till the price fell by 1.5%.

According to the Chinese authorities, China held 72.80 million troy ounces of gold at the end of May unchanged from the end of April. Meanwhile, China’s gold reserves at the end of February reached $1.7096 hundred billion, up from $1.6796 hundred billion at the end of April.

Admittedly, the key factor in the recent surge in gold prices was demand from central banks worldwide over the past two years. The World Gold Council (WGC) said China’s central bank was the largest buyer of gold in 2023, net buyer of 7.23 million ounces, the largest in one year since 1977.

Gold rose to a record high of $2,450 per ounce in May 2024, boosted by purchases by the central banks of each country, particularly the Chinese central bank’s demand for gold bars to increase reserves and prevent the yuan’s depreciation.

Why does China stockpile gold?

Technically, the central bank’s purchase of gold is mainly a diversification of international reserves, because gold is something that the price will not go down and also decrease in quantity continuously. Gold also reduces risks from fluctuations in the dollar or local currencies, and reduces risks from other factors such as global geopolitical and inflation although gold is still a very small proportion of the reserves.

In the past, China has relied primarily on U.S. dollars to trade worldwide, with more than $3.2 trillion in reserves in the world (March 2024) Most of these are U.S. dollar assets such as cash, deposits, bonds, and bills. China also holds the second-largest number of U.S. bonds in the world after Japan.

What purpose stopped China from stockpiling gold?

The China-US trade war, which has been prolonged since the arrival of US President Joe Biden, has raised tariffs on major Chinese exports, such as electric cars and batteries. As well as expanding into Europe, where tariff barriers against Chinese goods are being raised in line with the US. The escalation and expansion of trade wars have put pressure on capital flows in many areas, even in the global market.
The value of money has higher interest rates in the US than in China, which has forced capital outflows through many channels. For example, Chinese exporters who receive dollars may choose to keep their money abroad for higher interest, rather than immediately exchange it back to Yuan, while importers who have to pay dollars in the future may exchange their money for dollars in advance. Therefore, China is focusing on gold to tighten profitability in the future for better long-term results.
Problems in China’s real estate sector that have led to debenture defaults, bad debt risks in the banking sector, and the prolonged slump in the stock market have made the Chinese capital market less attractive to foreign investors, even though it is suitable for investment as a source of trade.

Gold purchases continued for 17 consecutive months despite the high prices and many countries’ gradual sell-off can reflect China’s long-term strategy to reduce its reliance on the U.S. dollar which is a long-term strategy that may be continued in the future. At present, gold currently accounts for only 4% of China’s reserves

References from
prachachat / mgronline / kaohoon / bangkokbiznews