On February 7, the State Administration of Foreign Exchange reported that by the end of January 2025, China's foreign exchange reserves stood at an impressive $3.209 trillionThis marked an increase of $6.7 billion from the end of December 2024, representing a slight growth of 0.21%. This is particularly noteworthy as it demonstrated that China's foreign exchange reserves have maintained a level surpassing the $3.2 trillion threshold for a consecutive duration of 14 monthsThis stability reflects the robust foundation of the Chinese economy, bolstered by its increasing global trade activities and continuous foreign investments.

According to the foreign exchange regulatory authority, the rise in foreign exchange reserves in January 2025 is attributed to several factors, including macroeconomic data from key economies, the monetary policies of main central banks, and related market expectations

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As the US dollar index experienced a decline, global financial asset prices exhibited an overall upward trendThe combined effects of currency conversion and asset price fluctuations contributed positively to the foreign exchange reserves during that monthFurthermore, the long-term positive conditions and trends supporting the Chinese economy remain unaltered, which should underpin the stability of the foreign exchange reserves going forward.

In terms of gold reserves, it is observed that the People's Bank of China has amassed additional gold for three consecutive monthsAs of January 2025, the central bank reported a gold reserve of 73.45 million ounces, approximately 2,284.55 metric tons, reflecting an increase of 160,000 ounces (around 4.98 tons) from the previous month's total of 73.29 million ouncesThe rise in gold reserves reflects a growing recognition of the asset's role in hedging economic uncertainties and diversifying reserves, as international gold prices climb amidst fluctuating dollar values.

Notably, as a result of the interplay between rising international gold prices and the declining dollar index, the value of China's gold reserves increased significantly from $191.34 billion at the end of December 2024 to $206.53 billion at the end of January 2025. However, the percentage of gold in China's total international reserve assets remains at 5.94%, below the approximate 15% global average, suggesting there is substantial room for diversification in China's reserve allocations

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This shortfall highlights a potential avenue for future growth in gold holdings.

According to Pang Ming, Chief Economist and Director of Research at JLL East Asia, while current gold reserves as a percentage of total reserve assets remain relatively low, this reality indicates a significant mismatch when compared to China’s economic size and total foreign exchange reservesThe demand for financial security and diversification of reserve assets only further intensifies the necessity for increased gold holdings going forward.

Industry experts share the prevailing sentiment that elevating gold as a reserve asset fosters the diversification of international reserves, effectively supporting value retention and appreciationAs a collective rather than isolated effort, diversifying reserve assets is gaining traction on a global scale, further emphasizing the need for sustainable and diversified foreign relations.

The driving forces behind this positive valuation effect can be traced back to foreign exchange rate adjustments and asset price variations, which primarily influenced the shift in reserve levels observed in January 2025. According to Wen Bin, Chief Economist of China Minsheng Bank, the decline in the dollar index—slipping by 0.1% to 108.4—and the appreciation of non-dollar currencies have positively impacted the foreign reserves as overall global asset prices surged

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The hedged, dollar-denominated global bond index rose by 0.4% while the S&P 500 index lifted by 2.7% in the same month.

Wen Bin noted that the current climate of external uncertainty is growing, with heightened frictions in international trade that perpetuate volatility in global financial marketsHowever, the continuing diversification of China’s international trade products and regional compositions is reinforcing resilience in external trade effortsThis steadfastness lays a solid foundation for stability in the balance of payments and supports the stability of foreign exchange reserves.

Guan Tao, Chief Economist at Bank of China International Securities, provided insight into the reasons behind the month’s stability in foreign reservesHe highlighted that the Federal Reserve, after facing a string of rate cuts since September of the previous year, opted for a pause in January, impacting the dollar index and US Treasury yields

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As the dollar index and treasury yields decreased in tandem, global stock indices witnessed further increases, creating favorable conditions for foreign reserves.

Regarding the Chinese currency, the Renminbi experienced a period of fluctuation but eventually rose to slightly exceed the end of the previous year's closing levelsThe resilience observed in the domestic foreign exchange market reflects the ongoing stability of the foreign reservesDuring the same period, interbank market trading of Renminbi saw trading records hit with an average monthly spot transaction of $37.2 billion, breaking historical figures for this time of year.

Looking ahead, Guan Tao anticipates that the Federal Reserve will continue to face the twin risks of insufficient tightening and excessive tightening, driven by data-dependent interest rate policiesMoreover, tensions in trade coupled with geopolitical conflicts signal upcoming volatility in international financial markets, potentially disturbing Chinese foreign reserves.

Nevertheless, Guan emphasizes that as China continues to implement comprehensive reforms and proactive macro policies, risks in key areas will be mitigated and external shocks addressed

With initiatives aimed at expanding domestic demand taking root, the continued stabilization of the Chinese economy is well-positioned to support both the Renminbi and the country’s foreign exchange reserves.

In recent months, the steady increase in gold reserves reflects broader market expectationsAs noted, the People's Bank of China has consistently augmented its gold holdings, likely influenced by upcoming shifts in geopolitical and economic landscapes following the USA's presidential elections in November 2024. Analysts forecast continued upward pressure on gold prices, enhanced by an environment where international gold prices have reached record highs of $2,882.39 per ounce as of February 5, marking a five-week streak of price increases.

Ming Ming, Chief Economist at CITIC Securities, outlined three compelling reasons for the continued bullish sentiment toward gold

With a resurgence of de-globalization trends following the new presidential administration in the US, gold is poised to reignite its appeal as a safe-haven assetThe anticipated persistence of central bank gold purchases adds another layer of support for gold prices, as does the probable continuation of expansive fiscal measures by the US government.

The recent white paper released by the Bank of China underscores that the connective logic driving this current bull market for gold remains intactThe trend of central banks purchasing gold as a hedge against depreciation remains potent, with ongoing geopolitical conflicts further accentuating gold’s position as a reliable store of valueTraditional frameworks regarding diminishing real interest rates in the US continue to bolster the attractiveness of gold as a strategic assetExperts project that gold will experience a long-term upward trend in 2025, potentially setting new historical records despite possible short-term volatility.

According to Louise Street, a senior market analyst at the World Gold Council, the demand for gold by global central banks is expected to remain dominant in 2025. Additionally, investments in gold ETFs are becoming an increasingly significant force supporting gold demand, particularly as interest rate cuts become the overarching trend set by the Federal Reserve