BEIJING, Dec 31 (CEIS): "To buy or not to buy?" It seems to be a difficult question for China's State Administration of Foreign Exchange in handling the country's gold reserve now.
Not to buy? The gold price may rise further. To buy? It is obviously not the best choice to make purchases at this high level though the price fell sharply recently.
Nevertheless, the key is whether or not it is necessary for China to build up its gold reserve.
According to IMF statistics, China's gold reserve stood at 600 tons at the end of June 2005, accounting for about 1.4 per cent of its foreign exchange reserve. The proportion is very low compared with that in many developed nations.
Some economists urge the government to increase gold reserve in a bid to change the past foreign exchange reserve pattern of relying too much on the US dollar. In their view, with the appreciation of the home currency, China's foreign exchange reserve assets denominated mainly in the greenback may face the danger of devaluation.
Teng Tai, chief economist of China Galaxy Securities Company, the country's top securities dealer, says in an article that China should increase its gold reserve to about 2,500 tons within a short period and have it maintained at the level of about 3,000 tons in the long run.
Call for gold reserve increase also has been echoed by Shen Xiangrong, director of the Shanghai Gold Exchange, China's sole gold market, for the purpose of offsetting foreign exchange risks in increasing foreign exchange reserve.
But some economists have shown disagreements: the US dollar may not necessarily devalue against other hard currencies, and China may adjust its foreign exchange reserve mix.
So far, the government has not expressed any opinion on this. Meanwhile, economists have wide disputes on how to increase gold reserves.