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China unlikely to buy gold from IMF

By Hou Qingyang (China Daily)
Updated: 2010-02-24 10:12
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Contrary to much speculation China may not buy the International Monetary Fund's (IMF) remaining 191.3 tons of gold which is up for sale as it does not want to upset the market, a top industry official told China Daily Tuesday.

"It is not feasible for China to buy the IMF bullion, as any purchase or even intent to do so would trigger market speculation and volatility," said the official from the China Gold Association, on condition of anonymity.

China unlikely to buy gold from IMF

A customer buys gold bars at a department store in Shanghai. China is more likely to shore up its bullion reserves by acquiring gold mines abroad. [China Daily]

He said China would continue to shore up its gold reserves by acquiring gold mines abroad rather than purchases on the international market.

Some analysts had earlier said China would purchase the IMF gold in an effort to diversify its dollar asset-dominated foreign exchange reserves. According to estimates, over 70 percent of China's $2.4 trillion foreign exchange reserves are in dollar assets.

The IMF said last week that it would expand its bullion sales to the open market. Central banks from India, Mauritius and Sri Lanka had purchased 212 tons of the yellow metal from the institution last year.

Zhu Baoliang, a researcher at the State Information Center, said China would not hike its gold reserves given the limited quantity available on the market. "Gold is only a small portion of the nation's reserves," he said.

According to the State Administration of Foreign Exchange, China held nearly 1,054 tons of gold reserves as of April last year, a value that equals 1.2 percent of the nation's gross domestic product, but still far below the world average of 10 percent.

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Gao Rukun, a researcher at Beijing Gold Economy Center, said that such a percentage is far too low and China should increase its gold reserves to 1,800 tons by 2014.

However, Asian Development Bank economist Zhuang Jian noted that buying IMF gold would not only help China diversify its foreign exchange reserves but also strengthen the yuan as an international currency.

Zhuang said China could have a bigger say in the IMF through the gold purchasing deal. "China can start with small purchases on the international market like the 191.3 tons of IMF gold. In the short term, the market will see volatility, but in the long term the prices will return to normal."

Gold gained 24 percent last year after hitting a record high of $1,227.50 an ounce in December as a weaker dollar boosted demand for it as an alternative investment.

China has been the world's largest gold producer since 2007 and surpassed India as the world's top gold consumer in 2009.