Never mind the old phrase ‘for all the tea in China’, for all the gold is much more appropriate. It’s been only 12 years since China lifted the ban on private ownership of gold, instituted when the communists came to power in 1949, yet the explosion of gold buying in the country has been staggering. Analysts predicted it easily passed India as the world’s biggest gold importer last year – and that’s just from what experts can piece together officially. Behind the scenes it is reckoned to be much larger.
While Western demand for gold continues to decline (many investors are dumping gold ETFs for example), in the East it’s the exact opposite. India’s love for the metal is long established, but the Indian government, reeling from the depreciation of the rupee and the country’s massive balance of payments problem, stepped in during the middle of 2013 and imposed a series of curbs to prevent gold imports.These totalled US$53.8 billion in the country’s last financial year, by far India’s biggest foreign import.
While over 380 tons of the metal was brought in between April and July 2013, that figure had fallen to around 148 tons from July to September. Although the curbs have officially strangled supply, there’s been a surge in gold smuggling into the country, much of it from Thailand where the World Gold Council (WGC) reported that demand was up by 125% in the third quarter of last year (compared with the same period in 2012). ‘Gold entering the country unofficially through India’s porous borders helped to meet pent-up demand,’ was how the WGC delicately put it.
The smuggling issue aside, despite official efforts to curtain citizens’ gold buying, jewellery demand in India was around 12% higher in the first nine months of 2013 as compared to same period in the preceding year, according to Reuters. Manufactured Indian jewellery is expected to bolster exports – mostly to the US – in the last quarter.
It is expected that even with the curbs, India would import around 1 000 tons in 2013. However, that figure is beginning to look paltry compared to what is going on in China. The gold market there, driven by an emerging middle class, is skyrocketing.
According to the WGC, demand in Hong Kong and mainland China for gold jewellery rose 40% and 35% respectively in 2013, compared to 2012. Credit Lyonnais Securities Asia, the Hong Kong-based financial services group, has disclosed that jewellery sales increased 115% in Hong Kong and 172% in China between 2009 and 2012.
Much of this is high-end 24-carat, and specifically ‘four nines’ jewellery. This is 99.99% pure gold (24-carat has a purity of 99.95%). Four nines is unique to China and the WGC says it ‘has proved to be most popular with consumers in lower tier markets and rural areas, again reflecting the investment qualities offered by such jewellery’. Mineweb claimed in late October that September was the fifth month in a row in 2013 that China’s net imports of the commodity via Hong Kong exceeded 100 tons.
While mainland China doesn’t divulge gold import figures (Hong Kong does, but that is regarded as merely a proxy for Beijing) many analysts have predicted that it will have easily imported more than 1 100 tons of gold in 2013 (the WGC says 1 091.5 to be exact) with some saying the true figure will be closer to 1 750 tons. If this figure is accurate it will account for 75% of all gold mined in the world in 2013 (excluding the roughly 430 tons the Chinese mine themselves, the world’s biggest total for a single country, of which only a tiny amount is exported). To give some comparison of figures, in April 2009 China’s central bank, the People’s Bank of China (PBC) divulged it had purchased 454 tons since 2003, making an average annual supply of about 75 tons.
The bank officially stated to the IMF (back in 2009) that it holds 1 054 tons in reserves. It has never revised that figure, but has said it will ‘seek diversification in the management of reserve assets’. This is taken to mean it intends to accumulate more gold. To make the matter clearer, in September the PBC released a draft policy document that detailed its plans to increase the number of companies allowed to import and export gold.
The importance of this was clearly illustrated when Reuters reported in early January that for the first time, two foreign banks had been given licences to import the metal. According to the news agency, ANZ and HSBC joined the nine local banks allowed to import, but both declined to comment on the claims.
In 2011 ANZ and HSBC were the first foreign banks allowed to trade gold futures on the Shanghai Futures Exchange.
‘China is actually increasing its transparency. I think there will possibly be further access to other banks as well,’ Cameron Alexander, manager of Asian precious metals demand at GFMS, told Reuters.
The recent buying of gold is thought to be the result of a concerted drive by the Chinese government to stockpile massive gold reserves, enough to match Western countries such as Germany (the world’s second biggest holder of the metal with around 3 400 tons) and the US, at the top of the pile, with over 8 000 tons.
How much does it hold now? Again that is up for debate but 5 000 tons has been bandied about in some quarters although Bloomberg says it is 2 710 tons and the WGC sticks to the 1 054 figure. Bloomberg claims that around 600 tons of the total that China imported in 2013 was destined for the central bank’s vaults, the rest going to private ownership. Bloomberg says research indicates that between 2009 (when it last released official figures) and the end of 2012, China stockpiled 1 034 tons in its reserves. At this rate, it will pass the US’s holdings within a decade.
The question is: why are the Chinese putting so much faith in gold? Well, apart from a cultural passion for the metal as an excellent investment and status symbol of newfound wealth, experts say it forms a key part of long-term government plans to challenge the dollar as the world’s benchmark currency with the Chinese currency, the renminbi.
They point to several statements by senior Chinese officials as well as the state-run news agency Xinhua, especially in the latter half of 2013 during the American domestic political standoff over the federal budget.
‘What may also be included as a key part of an effective reform is the introduction of a new international reserve currency that is to be created to replace the dominant US dollar, so that the international community could permanently stay away from the spillover of the intensifying domestic political turmoil in the US,’ reported Xinhua.
Holding the world’s biggest stockpile of gold would be a great symbol of the power of the Chinese economy, which is currently ranked the world’s second biggest and is expected to overtake the US within the next few years. In the long term, though, the key aspect will be control – of supply, demand and most importantly, prices.
