China’s Golden Ambition: How a Massive Gold-Buying Spree and Hong Kong’s Hub Plans are Boosting the Yuan Globally

Hello, this is Evelyn reporting from Beijing, bringing you the latest from 'The China Connection' — a digest of insights from local businesses.

For nearly two years, China has been on a relentless gold acquisition spree, a move that is much more than just an asset accumulation strategy. It's a critical component of Beijing's ambitious plan to elevate the yuan's international standing, narrowing the gap with the U.S. in precious metal holdings.

The Big Story: Gold as a Catalyst for Yuan Globalization

China's long-standing quest to internationalize its currency, the yuan (also known as the renminbi), is receiving a significant boost from Hong Kong's emergence as a major gold trading center, specifically designed to facilitate yuan-denominated transactions.

Charles Chang, Managing Director and Greater China Country Lead for corporate ratings at S&P Global Ratings, highlights the significance: "As those trading volumes grow, there would be a growing volume of the physical gold trade that is denominated in RMB and not linked in USD."

While the U.S. dollar currently dominates the global financial system, analysts acknowledge that China's aggressive gold purchases and Hong Kong's evolving trading platform are deliberate steps towards fostering greater global usage of the yuan. Chang explains the strategic advantage: "The challenge with internationalizing the RMB is it's somewhat more challenging to find places where you can use the RMB. In terms of gold particularly, if the RMB that the buyer receives can be converted to gold, then it gives more channels for the spending to be done."

Last month, Hong Kong officially reaffirmed its commitment to developing a robust yuan-denominated gold market. A pivotal step was taken last year when the special administrative region linked its gold vault with Shanghai's, enabling physical gold delivery to international institutions in Hong Kong using yuan. Furthermore, Hong Kong aims to dramatically expand its Shanghai-linked gold vault capacity from 150 tonnes to over 2,000 tonnes within the next three years, a volume nearly equivalent to China's entire current gold reserves. If successful, this would position Hong Kong as one of the world's largest gold trading centers.

Challenging the U.S. Dollar's Dominance

Despite China's rapid gold accumulation, the U.S. still holds the world's largest gold reserves at over 8,100 tonnes, compared to China's approximately 2,300 tonnes. However, China's consistent 23-month gold buying streak is seen as bolstering the credibility of the renminbi's internationalization drive.

Hao Zhou, Head of Research and Chief Economist at Guotai Junan International, states, "By steadily increasing gold reserves, Beijing is strengthening the long-term backing of its financial system and reducing reliance on dollar-denominated reserve assets. While gold alone will not determine the RMB's global role, it enhances confidence in the currency and supports broader efforts to expand its use in trade, investment and official reserves."

This gold accumulation trend, not just by China but by other central banks globally, is predicted to diminish global dependence on U.S. Treasurys and dollar reserves. Xia Yingying, Head of the Precious Metals and New Energy Research Group at Nanhua Futures, believes this will "suppress the U.S. dollar's premium from being a core reserve currency, and raise the risk premium associated with the dollar regarding credit, fiscal policy and sanctions. In the medium to-long-term it will gradually weaken the U.S. dollar's monopolistic position in the global reserve system."

Interestingly, this move by China coincides with U.S. Treasury Secretary Scott Bessent's appointment of Judy Shelton, a known gold-standard advocate, as a senior advisor focusing on China. The historical context is salient: China's rise as a manufacturing powerhouse greatly benefited from the U.S. abandoning the gold standard decades ago, leading to capital shifting to Asia in search of lower costs.

It's also worth noting that while China is a major player, it's part of a broader trend; many developing economies have expanded their gold reserves since 2022, with Poland, for instance, increasing its holdings by more tonnes than China.

Going to the Source: Control Over Gold Production

China's gold strategy extends beyond financial transactions to control over the supply chain itself. Similar to its approach with rare earths, Beijing's gold ambitions begin with securing control over production.

S&P Global Ratings reports that China has acquired significant gold mines across Latin America, Africa, and Asia. "China's plans for gold and its activities in gold are comprehensive and long lasting. These trends are going to be in place for a number of years," Chang asserts, adding that "The comprehensive nature of this is something that markets often miss."

Need to Know

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• China and Europe Halve Hybrid Vehicle Exports: European trade commissioner Maroš Sefčovič announced that China has agreed to halve its hybrid car exports to the bloc, amidst a challenging year for China's auto market with sales down over 20% in the first three quarters.
• China's Real Estate Market Nearing Turnaround: S&P Global Ratings predicts China's residential real estate prices may bottom out in Q3 2028, with major cities like Beijing and Shanghai potentially seeing a recovery as early as next year.

Coming Up

• Oct. 14: CPI, PPI; trade data
• Oct. 19: Q3 GDP, retail sales, industrial production, fixed-asset investment
• Oct. 19 - 22: Financial Street Forum in Beijing; Bund Summit in Shanghai