China - Buy Gold & Calls for Yuan Convertibility

There are simply growing signs that China finds it hard to manage its economy with the Yuan pegged to the Dollar. (Read : 20 Nov 2008 - Reuters - Yuan ends flat vs dollar as China hints at reforms) Plus there was market rumours that Chinese central bank is thinking of selling USD to increase Gold reserved from 600 tons to 4000 tons (source: Market News Intl). Although one may note that according to the TIC data released yesterday, China has now overtaken Japan has the largest foreign holder of US debt, we have already discussed that the change in trade dynamcis between China and US may change this position. Overall, we believe that it is in Chinese interest to diversify its source of growth, FX reserve and asset exposure. All pointing to them having to buy more Gold to be inline with other Central Bank's Gold exposure.