China Buying More Gold To Replace US Dollar Assets
The US Treasury figures show that countries like Japan, India and Germany all have decreased their holdings of US debts in 2018. Central banks world wide, have increased gold purchases in recent months to replace US dollar-denominated assets, which may be due to the US diving creditability as a result of the “irrational behavior” that’s on the rise in the US.
In 2018, central banks around the World added 651.5 tons of gold to official reserves, a rise of 74 percent on a yearly basis and the second-highest yearly total on record, as per a report.
The US Treasury figures showed that the China held $1.1235 trillion worth of US Treasury bonds as of December 31, 2018, compared with $1.1849 trillion a year earlier. China is just one of the countries that has been buying more gold.
According to the World Gold Council, global demand reached 4,345.1 tons in 2018, up 4 percent on a yearly basis. The increase was partly driven by a multi-decade high in bank buying.
Since the start of the China-US trade dispute, China probably realizing the risks in holding the US dollar, is taking action to increase holdings of other financial assets such as gold to replace its US dollar-denominated assets.
Dong Dengxin, director of the Finance and Securities Institute at Wuhan University, said that
“A common view has formed across the world that the decline in US creditworthiness, resulting from the ‘America First’ policy, the transition in US trade policy, and ‘flip-flopping’ of the US president, is hurting the global economy and destabilizing the global financial system.
Therefore, many countries feel unsafe, and they are choosing to reduce dollar asset allocation to protect themselves from potential risks. “
The People’s Bank of China (PBC), the central bank of Chinese Government, bought $179 million worth of gold in February, the fifth month in which China increased its holdings of gold in terms of value, according to the State Administration of Foreign Exchange.
As of the end of February, China’s official reserve gold assets stood at $79.498 billion in value, compared with $79.319 billion as of the end of January.
Experts said that uncertainties in the bilateral relationship between China and the US, particularly the ongoing trade dispute, are pushing China to reduce its holdings of US dollars and increase holdings of other financial assets such as gold.
As the relationship between China and the US is tense, it’s possible that China’s US dollar-denominated assets might be frozen by the US government at some point, which would deal a blow to China’s foreign exchange reserves.