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China faces dilemma on expanding gold reserve
Updated: 2005-12-26 17:08

To buy or not buy? That's a question for Chinese foreign exchange authorities. They have been urged to expand gold reserve since the Renminbi appreciation, but the decision is hard to make since the gold prices are rocketing.

Some economists have been appealing to the State Administration of Foreign Exchange to expand China's gold reserve after the Renminbi appreciation in a bid to reduce the country's reliance on the greenback.

But others believe it's not a proper time to buy gold at such high prices.

The State Administration of Foreign Exchange did not let out their voice, but folk economists have been prompting them to take actions.

China should increase its gold reserve from 600 tons to about 2,500 tons in a short term and to 3,000 tons in a long term to cope with the versatile exchange rate risks, said Teng Tai, an economist of China Galaxy Securities Company.

Too little gold reserve would pose threat not only to China, but also to the global monetary system, Teng said.

China should increase gold reserve to reduce the foreign exchanges risks and diversify its state reserve with various goods, like gold and oil, in the long run, said Shen Xiangrong, director of the Shanghai Gold Exchange, China's sole gold market.

The appeal is closely related with China's exchange rate reform on July 21 this year. The Renminbi had been pegged to U.S. dollars in the past few years before the reform. Quite a big proportion of China's foreign exchange reserves are bond assets denominated in the greenback. The assets will face depreciation after the Renminbi appreciation.

Global investors could benefit from buying Renminbi, but not Chinese investors and what they could buy is only gold, Teng said.

China reported about 600 tons of gold reserve at the end of June 2005, about 1.4 percent of the total foreign exchange reserve, according to figures from the International Monetary Fund (IMF).

The proportion is much lower in comparison with many other countries.

According to World Gold Council, many countries and organizations report more than 1,000 tons of gold reserve, including the United States, Germany, France, Italy, Switzerland and the IMF.

Gold takes about 60.4 percent of the total strategic reserve in the United States, according to the Council.

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