China’s central bank significantly increased its gold reserves in September, marking the largest monthly accumulation in three years as it seeks to reduce reliance on U.S. dollar assets amid ongoing tensions with Washington. The People’s Bank of China (PBOC) added 740,000 troy ounces (approximately 23 tonnes) of gold, bringing its total holdings to 77.47 million ounces by the end of the month. This stockpile is valued at around US$324 billion based on current market prices, set against the country’s foreign exchange reserves of approximately US$3.4 trillion.

The increase coincided with a 6.3 percent decline in gold prices during September, driven by rising U.S. Treasury yields that attracted investor interest to bond markets. The PBOC has now expanded its gold reserves for 23 consecutive months, viewing gold as a strategic alternative to U.S. dollar assets amid concerns over U.S. debt levels and the dominance of dollar-based financial systems. Reflecting this shift, China’s direct holdings of U.S. Treasuries have fallen to an 18-year low.

Domestic demand for gold also surged this year in China, influenced by a weakening stock market, low interest rates, and a prolonged downturn in the property sector. Mainland-listed gold exchange-traded funds (ETFs) increased their gold holdings by 18 percent—equivalent to 44 tonnes—during the first eight months of 2023, a marked contrast to relatively stable globally traded gold ETFs. During China’s National Day holiday, buyers gathered in Shenzhen’s Shuibei gold district, attracted by a stronger yuan and lower gold prices following a global sell-off.

Meanwhile, Hong Kong investors have shown renewed interest in U.S. Treasury securities, with the benchmark 10-year bond yield surpassing 5.36 percent last week, its highest level in 24 years. The region’s pegged currency system limits exchange rate risk, but concerns remain that further interest rate hikes by the U.S. Federal Reserve could trigger a market sell-off.

Looking ahead, Hong Kong will introduce yuan-denominated gold futures trading early next year, according to Gregory Yu, managing director and head of markets at Hong Kong Exchanges and Clearing (HKEX). CEO Bonnie Chan Yiting also announced plans to launch other yuan-based precious metals products. These developments support the Chinese government’s broader efforts to internationalize the yuan and elevate the city’s standing in the global gold market.

China’s long history with gold has been complemented by more recent institutional advancements. The Shanghai Gold Exchange, established in 2002, initially limited trading to bars from a few domestic refineries. Over time, China liberalized its gold market, opening it to overseas investors in 2014 and introducing connect programs with Hong Kong and Shenzhen that allow cross-border gold trading. This has helped make Shanghai the largest physical gold exchange worldwide by volume.

Hong Kong is positioning itself as a significant player in global gold trading through the creation of Asia’s first centrally cleared offshore gold market launched in July. This setup facilitates trading by enabling banks to exchange claims on a centralized gold pool rather than physical bars, while plans are underway to expand Hong Kong’s gold storage capacity tenfold by 2028. This infrastructure aims to establish Hong Kong not merely as a trading hub but as a price-setting center for global gold.

These initiatives form part of China’s broader “Gold Road” strategy to develop a global network of vaults supporting yuan-denominated gold trading across partner countries. By enabling local storage and clearing, the project seeks to reduce reliance on traditional gold markets in London and New York, enhance yuan liquidity, and encourage foreign central banks to hold the yuan in their reserves.

Despite substantial gold purchases, gold accounts for roughly 10 percent of China’s official reserves, a smaller share compared to some Western countries where gold holdings often exceed two-thirds of reserves. China’s reserves remain predominantly invested in foreign-currency bonds. The overall gold holdings by the Chinese government may be higher when considering stockpiles managed by sovereign wealth funds and state-owned commercial banks.

Chinese gold mining companies have also expanded internationally, acquiring assets to increase their metal reserves. Zijin Gold International, for example, completed a US$3.7 billion Hong Kong initial public offering in 2022 and acquired a controlling stake in Chifeng Jilong Gold Mining earlier this year for US$2.7 billion. Zijin’s attempted US$3.9 billion takeover of Canadian miner Allied Gold Corp. was abandoned in July due to regulatory concerns over capital outflows and security issues related to Allied’s operations in Mali, a region experiencing growing instability. Instead, Zijin opted for a smaller US$295 million stake, just below the regulatory threshold requiring government approval.