I’m not catching China’s gold bug

FP readers have no doubt discerned that your humble blogger’s #1 topic of interest for 2009 has been the relative rise of China, the relative decline of the United States and the effects of these power shifts on the global political economy.

That said, an emerging subtheme will be breathlessly hyped reporting that melodramatically exaggerates either shifts in China’s power or shifts in Chinese preferences. 

For exhibit A, I give you the Financial Times Jamil Anderlini and Javier Blas , who report, "China reveals big rise in gold reserves."  Let’s go to the lede:

China has quietly almost doubled its gold reserves to become the world’s fifth-biggest holder of the precious metal, it emerged on Friday, in a move that signals the revival of bullion after years of fading importance.

Gold rose to a three-week high of more than $910 an ounce after Hu Xiaolian, head of the secretive State Administration of Foreign Exchange, which manages the country’s $1,954bn in foreign exchange reserves, revealed China had 1,054 tonnes of gold, up from 600 tonnes in 2003.

The news could spark interest in gold among other central banks. “When the largest holder of foreign exchange reserves discloses an increase in gold holdings, other countries may decide to think more carefully about underweight gold positions,” said John Reade, a precious metals strategist at UBS.

The increase in China’s gold reserves has come primarily from domestic production and refining. However, the news raises questions about the future of Beijing’s foreign reserves policy.

Ooooh…. this could be a Very Big Deal!!  Gold could supplant the dollar!!  Hide the children in the basement!!

Well, let’s crunch the numbers first.  Unless MS Excel’s my math is way off, China’s gold reserves are now roughly worth $30 billion.  Which means they constitute less than two percent of China’s total reserve holdings.  Furthermore, China’s doubling of its gold reserves in the past five years actually means that Beijing has diversified away from gold, since the total value of China’s foreign exchange reserves has increased tenfold during the same period of time. 

No wonder, therefore, that buried deep down into this story you see the following passage: 

Paul Atherley, Beijing-based managing director of Leyshon Resources, said that even after the latest purchases China had a very small percentage of its reserves in gold, far below the US or other developed countries.

“Those [gold] holdings are still too low in terms of the size of its economy and the growing significance of its currency,” he said.

China’s power is undoubtedly increasing.  Not every action by Beijing, however, is indicative of attempts to alter the current global political economy.