Why Is The Mainland Chinese Government Encouraging Citizens To Buy Gold?

In a two-part series that begins here and ends here, Stuart Burns tackles the question. At first, he wonders if the PRC is trying to make the renminbi a gold-backed currency, which he then dismisses. It would take too much gold, and a 1978 amendment to the IMF says member countries are not allowed to peg their currencies to the metal. He then discusses the possibility that the government seeks to get out of U.S. Treasuries, which he considers controversial. Then, he supplies his answer: gold buying is being encouraged as a sink for excess liquidity.

Encouraging citizens to buy cars, white goods and electronics is good for industry, but the rate of growth has been so rapid – aided and abetted, one should add, by the stimulus measures introduced by Beijing in the aftermath of the financial crisis and has since largely wound down – that it has brought price inflation with it. Raising interest rates and bank reserve requirements has the desired effect of slowing demand, but at the additional cost of raising costs for industry. Giving the population something else to speculate on apart from property prices could be the intent. Nor can we see how encouraging the public to buy gold furthers the aims of a currency reserve standard — India has been the largest importer of gold for many years, most of it bought by the general public, yet the rupee is a long way from the front runners as the next reserve currency.

He concludes by saying this policy is likely to continue for years to come.


Another reason, which he doesn't mention, is the PRC rulership going with the flow of tradition. Holding physical gold as a means of storing wealth is a long-standing practice in China, although silver has been more of a mainstay. Since this tradition ties in with wealth, and has no political implications at all, it's a safe one for the rulership to encourage.