December 8, 2009 / 4:24 AM / 11 years ago

Official Chinese paper calls for more gold reserves

BEIJING, Dec 8 (Reuters) - China should increase the proportion of gold in its foreign exchange reserves to ensure the safety of its overall portfolio, an official Chinese newspaper said on Tuesday.

The commentary, which was written by an academic and appeared in the overseas edition of the People’s Daily, also said that a bigger holding of gold was a crucial building block for the yuan to become an international currency.

Gold XAU= has soared to record highs over the past month, in part on expectations that China will step up gold purchases to boost its official reserves of the precious metal.

“Although the return on gold may not be high, its safety is widely acknowledged. We should put safety first in managing our foreign exchange reserves and do our utmost to ensure that we can maintain the value of our current assets,” Jing Naiquan, an assistant professor of economics at Zhejiang University, wrote.

He added that the dollar’s credibility has been supported over the decades by sizeable U.S. gold reserves, and that gold is an important backstop for all free-floating currencies.

“Having sufficient gold ensures that a currency will gain global acceptance, so the renminbi will inevitably need gold as a guarantor as it goes out to the world,” he wrote.

The Chinese-language overseas edition of the People’s Daily is a low-circulation offshoot of the domestic paper, which is the official mouthpiece of the ruling Communist Party.

While such a commentary might not directly reflect leadership opinion, its appearance in China’s tightly controlled official media suggests the idea of buying more gold has at least some support in elite circles.

However, Hu Xiaolian, a vice-governor of the People’s Bank of China, said last week that gold prices were high and that markets should be wary of the formation of an asset bubble.

China said in April that its official gold holdings had risen to 1,054 tonnes from 600 tonnes in 2003, but gold is still a small portion of its $2.27 trillion of foreign exchange reserves, which are mostly invested in dollar-denominated assets.

But China is the world’s biggest producer of gold and the government said that its increase in gold holdings in recent years was acquired entirely domestically, not on the international market.

(Reporting by Simon Rabinovitch; Editing by Ken Wills)

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