China added 1.03 million ounces (32 tons) of gold to its reserves in November 2022, according to an official statement by China’s State Administration of Foreign Exchange (SAFE) on Dec. 7.  Meanwhile, its holdings of U.S. treasury bonds fell to a 12-year low.

Analysts speculate that while China augments its gold reserves to hedge against risk, reducing U.S. dollar assets aims to mitigate possible sanctions for its support of Russia’s Ukraine invasion.

The increase brings China’s reported gold holdings to 63.67 million ounces (1,980 tons), worth about $112 billion. The SAFE statement is the first official update on China’s reserve assets since September 2019.

China’s holdings of U.S. treasury bonds dropped for the second month, to their lowest level since June 2010. The decrease left its holdings below $1 trillion for the sixth straight month.

A Global Trend

The move was in line with the overall demand for gold in 2022, as central banks around the world increased their gold reserves. Data published by World Gold Council on Dec. 2 showed that international gold reserves sustained a 41 percent increase in October. They are currently at their highest level since 1974, totaling 36,782 tons of gold.

In the third quarter of 2022, the total amount of gold purchased by global central banks was estimated to be almost 400 tons, worth around $20 billion. It was the largest single-quarter gold purchase globally since 2000, based on data published by World Gold Council in November.

As central banks scramble to purchase gold, total holdings of U.S. treasury bonds have declined. The volume of U.S. treasury bonds held by overseas central banks shrank continuously in September and October.

The number slid from $7.5386 trillion at the end of August to $7.1854 trillion at the end of October, according to data released by the U.S. Treasury Department on Dec. 15. The decrease totaled $353.2 billion.

Japan, the top foreign owner of U.S. treasury debt, reduced its holdings for four consecutive months in 2022; they stood at $1.078 trillion in October.

The price of U.S. treasuries has been dropping since August 2020 when the price of  30-year treasury bonds stood at over $182. The price was slightly over $125 on Dec. 30.

Given the current tendency to buy gold and sell U.S. treasury bonds, some experts suggest that the measures are intended to compensate for losses caused by the falling price of U.S. securities, and as a hedge against inflation.

Complex Motives

China’s motives may be more complex, however.

Albert Song is a researcher at Tianjun, a political and economics think tank. He told The Epoch Times on Dec. 31: “It may not be the top priority for the CCP to offset the adverse impact of falling prices of U.S. treasury bonds.”

While Song acknowledged that China may wish to hedge against risk, he emphasized that the CCP also “wants to avoid the latent risk of sanctions for its clandestine support for the Russian invasion of Ukraine.’

Moreover, he added, “The salient facts are the escalating tension of U.S.–China relations and [China’s] decoupling on every front.”

Song said he suspects that the CCP frequently provides false data to present an inflated image of China’s economy.

“Although the CCP’s central bank has disclosed that it has increased its gold reserves by 32 tons by the end of November, the published data is overstated to some extent,” he said, noting that “the amount is smaller than that of other gold-exporting countries, which may indicate that gold has been used for other purposes.”

To illustrate the discrepancy, Song pointed to data showing that Switzerland shipped 80.1 tons of gold to China in July, the second-highest monthly total since 2012.

Gold’s Unique Functions

Global gold prices fluctuated wildly in 2022. In March, due to the outbreak of the Russia–Ukraine war, gold soared to $2,000 per ounce, then fell as a consequence of the Federal Reserve’s strong interest rate hike. It witnessed a rebound later in the year, and started the new year at a six-month high.

In a world of intensifying political and economic uncertainty, augmenting gold reserves becomes a priority, Song said.

“Gold, as the hard currency favored by both the government and the people for hundreds of years, bears unique functions of hedge and appreciation, which ordinary currencies lack. Gold becomes germane particularly when a government is increasing money supply excessively.”

Article by Kathleen Li from our premium news partners at The Epoch Times.

“We love our suppliers, and we have a very strong relationship, but we are very dependant on the supplies coming from China. … We think there are risks in terms of the stability of the supply, given everything happens geopolitically,” Tim Karimov, president of U.S. lithium battery manufacturer OneCharge, said in a presentation at the MODEX 22 seminar.

MODEX is the largest manufacturing and supply chain expo held in North America and South America. MODEX 22 was held on March 28-31 at Atlanta’s Georgia World Congress Center.

In January, OneCharge released a white paper addressing the U.S. role in global lithium battery manufacturing and the risks China poses to the supply chain.

“China currently dominates the global lithium battery supply chain. Upwards of 70% of the total global Li-ion battery manufacturing capacity is controlled by China. … Should China decide to throttle supply or dramatically raise prices, this would hurt the U.S. transportation and logistics sectors, which are quickly adopting lithium battery-powered electric vehicles,” the report states.

According to the Chinese digital newspaper The Paper, BYD Co. Ltd. (01211.HK), a Chinese conglomerate and electric vehicle manufacturer, is currently in talks to buy six lithium mines in Africa containing more than 27 million tons of lithium oxide at 2.5 percent grade—enough to supply BYD with 10 years of lithium oxide.

EV manufacturers have come under pressure due to the soaring lithium price for EV batteries amid the surging demand for electric vehicles. As a result, many companies also have stepped into the global race to acquire lithium mines.

China’s lithium sources primarily come from ecologically fragile areas, such as the Qinghai-Tibet Plateau, with a harsh natural environment, poor infrastructure, and significant technical challenges. Despite those challenges, Beijing has actively encouraged Chinese state-backed companies to secure lithium mines overseas to surpass Europe and the United States in the new energy industry, according to Chinese state-run media Yicai.

Chinese Control in Critical Lithium Resources

The lithium industry has a high degree of market concentration. In 2020, five companies accounted for nearly half of the world’s lithium production capacity, producing approximately 75 percent of the worldwide supply, according to a report released by China Merchants Bank Research Institute on March 4.

Two of the five companies—Jiangxi Ganfeng Lithium Co. Ltd. (01772.HK) and Tianqi Lithium Co. Ltd. (02466.SZ)—are from China. Both companies have taken up significant shares in global lithium resources, allowing them to control the lithium supply chain.

Chinese battery giant Ganfeng Lithium’s overseas footprint in lithium resources spans Australia, Argentina, and Ireland, according to its 2021 annual report.

Among them, the Mount Marion Project in Australia is the largest source of Ganfeng’s lithium supply. Ganfeng secures stable raw materials supplies by signing long-term procurement agreements with upstream lithium providers after investing in them.

Chinese giant Tianqi Lithium has also secured its lithium supplies by purchasing massive shares of leading companies in the upstream lithium supply chain. In 2014, Tianqi Lithium acquired 51 percent shares in Windfield Holdings, the shareholder of Talison Lithium, which owns the Greenbushes lithium deposit in Western Australia—the world’s largest hard-rock lithium mine.

And in 2018, Tianqi Lithium purchased 23.77 percent shares in SQM, a world-leading brine-based lithium producer. The company has since become the second-largest shareholder of SQM.