Conspiracy theories abound about China's gold purchases

China's huge appetite for gold has inspired dozens of conspiracy theories. They are all nonsense.

Yes, it is true that China has been buying an awful lot of gold recently. According to figures from Hong Kong's Census and Statistics Department, last year the mainland imported an impressive 1,497 tonnes of the yellow metal through the city.

Some of that gold came back again after being turned into jewellery, figurines of horses and the like. Even so, China's net imports of gold through Hong Kong last year were worth a thumping HK$409 billion. That's roughly 1,170 tonnes of bullion.

To put that into perspective, it's equivalent to 40 per cent of all the gold produced by all the mines in the world last year.

Of course, most of the gold purchased by Chinese importers didn't come straight from the world's mines.

Much of it came from exchange-traded funds, which last year sold down their holdings of the metal by some 896 tonnes after investors in developed markets lost faith in gold's ability to make further price gains.

But while the enthusiasm of Western investors for gold has dulled, over the last two and a half years China's demand for the stuff has exploded.

Last year China surpassed India as the world's largest gold importer. On top of that, in recent years China has emerged as the world's largest miner of the stuff. In 2013 the country's mines produced 428 tonnes of the metal, up from 392 tonnes in 2012. South Africa, long the world's biggest miner, produced less than half that amount.

This gold buying - and mining - binge has fuelled more than a few conspiracy theories.

One of the more fanciful alleges that the US Federal Reserve is deliberately suppressing the price of gold, lest the metal displace the US dollar as a trusted store of value.

Aware of the Fed's nefarious intentions, Beijing is taking advantage of gold's low price secretly to accumulate vast stocks of bullion.

Beijing's aim, according to this theory, is to amass enough of the precious metal to allow it to back its currency with gold, at which point the Chinese government will attempt to launch a new global monetary system based on the yuan and gold, rather than the paper US dollar.

Part of the reason these theories are able to gain traction is Beijing's own reticence about its official gold holdings.

The last time the People's Bank of China revised the figure for its gold reserves was in April 2009, when it admitted to holding 1,054 tonnes of the stuff.

Given the sheer size of China's gold imports since then, as well as the growth of its mine production, analysts variously estimate that the central bank's gold reserves now stand anywhere between 2,700 tonnes and 5,000 tonnes.

Alas, even 5,000 tonnes would be nothing like enough to launch a convincing monetary system. Fully backing China's monetary base - the yuan in issue plus Chinese banks' reserves held by the PBOC - would require 110,000 tonnes of gold, or around two-thirds of all the metal that has ever been mined.

And in all probability the 5,000 tonne figure is a gross overestimate of China's official reserves, given that China's imports through Hong Kong went overwhelmingly to satisfy consumer demand for jewellery and private investors' appetite for bullion.

The lower figure of 2,700 tonnes of official holdings is surely closer to the truth. At current prices, that means Beijing's official gold reserves would be worth around US$110 billion, which is less than 3 per cent of China's overall foreign exchange reserves.

That's roughly the same proportion of its foreign reserves that the central bank held in gold 10 years ago.

So, far from plotting to corner gold markets and take over the world's monetary system, it looks as if China may be doing nothing more than maintaining a constant allocation to the stuff.

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