Foreign exchange reserves have remained above $3.3 trillion for eight consecutive months, and the reason has been identified!

Why is the People’s Bank of China increasing gold holdings amid a sharp decline in gold prices?

Reporter Tang Jing, 21st Century Business Herald

On April 7, the State Administration of Foreign Exchange data showed that by the end of March 2026, China’s foreign exchange reserves stood at $3.3421 trillion, down $85.7 billion from the end of February, a decrease of 2.5%. Despite the month-on-month decline, foreign exchange reserves have remained above $3.3 trillion for eight consecutive months.

The State Administration of Foreign Exchange stated that in March 2026, influenced by global macroeconomic conditions, monetary policies and expectations of major economies, the US dollar index rose, and prices of major global financial assets fell. Factors such as exchange rate conversion and asset price changes combined to cause a decline in foreign exchange reserves that month. China’s economic operation remained generally stable, with steady progress and new achievements in high-quality development, supporting the basic stability of foreign exchange reserves.

Wang Qing, Chief Macro Analyst at Orient Securities, told reporters that the foreign reserves shrank month-on-month at the end of March, the largest decline since February 2016, mainly due to the rapid rise of the US dollar index and a sharp drop in global financial asset prices. In mid-March, geopolitical risks erupted in the Middle East, driving safe-haven demand and accelerating the rise of the US dollar index, which increased by 2.29% that month, the largest gain in nearly eight months. This led to depreciation of non-dollar assets in China’s foreign reserves, lowering the dollar-denominated reserve total.

Regarding the central bank’s significant increase in gold holdings, there are many voices in the market about “bottom-fishing.” However, Wang Lixin, CEO of the China chapter of the World Gold Council, told reporters that the global central banks’ increased gold purchases are not based on short-term profit from rising gold prices but are part of a long-term allocation strategy.

Wang Lixin straightforwardly said that the primary requirements for central bank reserve assets are safety, good liquidity, and only then consideration of returns. One major reason for continuous gold accumulation is to diversify their reserve asset composition and reduce over-reliance on any single sovereign currency; another is to leverage gold’s role as a hedge amid increasing global financial asset volatility, helping to reduce fluctuations in reserves.

Historically, the financial markets have observed an interesting phenomenon: whenever the US dollar index rises significantly in a month, many countries’ foreign exchange reserves decrease in value when non-dollar assets are converted into dollars, resulting in a month-on-month decline.

Guan Tao, Chief Economist at Bank of China International Securities, told reporters that in March, foreign exchange reserves decreased by $85.7 billion to $3.3421 trillion, ending a streak of seven consecutive monthly increases. This mainly reflects the effects of exchange rate conversion and asset price changes under the influence of monetary policies, expectations, and macroeconomic data of major economies, leading to negative valuation effects.

Influenced by global macroeconomic conditions, monetary policies and expectations of major economies, the US dollar index continued to strengthen in March, reaching the 100 mark again after three months, with a total increase of 2.4% to 99.96 for the month. Non-dollar currencies and global financial asset prices generally declined, with dollar-hedged global bond indices falling 1.8%, and the S&P 500 stock index dropping 5.1%.

Wen Bin, Chief Economist at China Minsheng Bank, explained that in March, the ongoing escalation of conflicts between the US, Iran, and other regions, including Iran’s blockade of the Strait of Hormuz, disrupted oil exports from the Middle East, causing crude oil prices to surge and global asset prices to fall. Rising oil prices increased inflation expectations, and markets even began betting on Federal Reserve rate hikes. Under the dual support of prolonged high interest rates and returning safe-haven funds, the US dollar index continued to strengthen. The combined effects of asset price changes and exchange rate fluctuations caused foreign exchange reserves to decline by $85.7 billion at the end of March.

Looking ahead, Wen Bin believes that exports will continue to play a fundamental role in the balance of payments: since the beginning of the year, China’s exports have far exceeded expectations, with a year-on-year growth rate of 21.8% in January and February. This not only reflects strong external demand but also results from the diversification of China’s export markets and the upgrading of export product structures. Amid global supply chain disruptions caused by oil price shocks, China’s advantages in new energy manufacturing and entire industrial chains will be further highlighted.

In terms of cross-border capital flows, Wen Bin expects that as China continues to expand access to the service sector and deepen institutional opening, the facilitation of cross-border investment and financing will improve, and foreign direct investment will remain stable. Meanwhile, the valuation and allocation advantages of RMB assets will become more apparent, and reasonable inflows of securities investment are expected to continue. China’s overall economic operation remains stable, with steady progress and new achievements in high-quality development, providing solid support for maintaining the stability of foreign exchange reserves.

Wang Qing emphasized that even if there is a month-on-month decline, the foreign reserves in March are still near a ten-year high. According to different standards, China’s foreign reserves above $3.3 trillion are still relatively ample. In the context of increased external political and economic volatility, a moderately ample reserve scale can support the RMB exchange rate at a reasonable and balanced level and serve as a ballast against potential external shocks.

Regarding gold reserves, the central bank’s gold holdings increased for the 17th consecutive month in March 2026, with an increase of 160k ounces—the highest since December 2024. In March 2026, international gold prices experienced their worst monthly plunge since the 2008 financial crisis, falling 11.54%, the largest monthly decline in nearly 17 years.

Since the new round of gold accumulation began in November 2024, the pace of central bank gold purchases has slowed overall, but in March 2026, the increase suddenly accelerated.

Wang Qing told reporters that the sharp rise in international oil prices driven by evolving Middle East tensions, along with cooling global monetary easing expectations including Federal Reserve rate cuts, contributed to a double-digit decline in international gold prices in March, which may be a direct reason for the central bank’s accelerated gold purchases that month. Additionally, geopolitical risks in the Middle East are also a factor driving central banks to increase gold holdings.

According to An Kai, CEO of the Americas at the World Gold Council and head of global research, central bank gold purchases will remain a key variable in the gold market in 2026. In recent years, emerging market central banks have continued to increase their gold reserves, becoming an important driver of gold demand. Gold accounts for about 25% of global foreign exchange reserves, with about 30% in developed economies and 15% in emerging markets. As the global reserve structure becomes more diversified, the proportion of gold held by emerging market central banks is expected to further increase.

An Kai stated that central bank gold buying reflects the trust and reliance of the global monetary system on gold and further consolidates gold’s strategic position on central bank balance sheets. In an uncertain global environment, the strategic value of gold is increasingly prominent. Whether as a risk hedge or a diversification tool, gold will continue to play an irreplaceable role in the global financial system.

Industry insiders believe that China’s central bank’s gold accumulation is mainly influenced by several factors: first, increased volatility in global financial markets; by increasing gold holdings, China can reduce fluctuations in reserve assets; second, changing international circumstances prompt countries to accelerate diversification of their reserves, with gold serving as a traditional safe-haven and supra-sovereign asset, providing better asset protection; third, gold is widely accepted as a final means of payment worldwide, and central bank gold accumulation can enhance the credibility of sovereign currencies.

Data shows that after 17 consecutive months of increases, China’s total gold reserves reached 74.38 million ounces, accounting for over 9.13% of China’s reserve assets, still well below the global average of about 15%. Historically, countries like France and Germany have maintained gold reserves exceeding 50% of their reserve assets, while South Africa and Argentina have gold proportions over 10%.

Ming Pang, a senior researcher at the National Finance and Development Laboratory, believes that gold’s irreplaceable advantages in hedging, anti-inflation, and long-term preservation, combined with its multiple attributes as a financial and commodity asset, mean that China’s central bank will continue to pursue diversification of international reserves and include and dynamically adjust gold reserves in its portfolio. The strategic direction of increasing gold holdings will remain unchanged.