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China's latest gold figures look unrelentingly
bullish. Too bullish perhaps...
SO "GROWTH has
[now] replaced inflation as Beijing's top policy concern," says Qu Hongbin, Asian economics
expert at HSBC in Hong Kong, forecasting three cuts to China's banking
reserve requirements by July.
"There
is developing in Beijing, I think, almost a panic about global economic
prospects and the impact of the European crisis on China," agrees Michael Pettis, finance professor at Peking University. He goes one further and
forecasts debate – if not the fact – of a currency devaluation in
2012.
Yes,
you read that right. In a US election year, Beijing's policy wonks are
arguing over cutting the Yuan's foreign exchange value, not raising it.
China's
stellar growth since joining the World Trade Organization a decade ago has of
course been driven by exporting cheap goods to the rest of the world. And to
gee things along, the People's Bank of course keeps the Yuan (aka Renmimbi) closely pegged to the Dollar – ensuring
that devaluation by the US Fed can't price Chinese goods out of the market.
"Within
China," Pettis now believes, "many are
going to argue that the rapid decline in the trade
surplus, coupled with unmistakable evidence of flight
capital, means that the PBoC should devalue the
RMB."
Flight
capital? The tide of cash in Renminbi accounts
– after clamoring to get in ahead of the currency's widely assumed and hotly politicized rise
– just recorded its first back-to-back months of
outflows since 2000. Analysts guess it's because the
dead-cert of an upwards revaluation is now off the table. Beijing is only
encouraging that view.
"Exports
are set to slow [in 2012]," said Shen Danyang, a spokesman for the Ministry of Commerce, in mid-December.
"We will further accelerate reforms to...make overall trade remain a
positive contribution to the economy."
Such
reform cannot mean a rise in the Yuan. Not if overall trade is to continue
adding to GDP. Which only confuses the picture for China's
gold investment and jewelry demand, now the
second-largest after India, perennial sink of the world for physical gold.
Wednesday
brought news that gold imports to China through Hong Kong set a fresh monthly record in
November of more than 100 tonnes.
That's
quite a chunk however you weigh it. China's full-year 2010 imports are
estimated to have been some 245 tonnes. Domestic gold mining production (now
the biggest in the world, and trapped by a ban on
gold exports) totaled some 340 tonnes. Already last
year, record monthly gold imports from Hong Kong in October had led one
analyst, Tom Kendall of Credit
Suisse, to forecast total 2011 imports of perhaps
490 tonnes. Double the 2010 total
by weight, that would represent a 150% rise in Chinese gold imports by Yuan
value, and come on top of the 10% rise in domestic gold mining output to 375
tonnes forecast
in August by the Ministry
of Industry and Information Technology.
Ever-more
Chinese wealth, in short, is going to gold, and coupled with households' fear
of inflation, this new debate over actively devaluing the currency means gold
investment demand is only likely to rise again. That would depress China's
trade surplus, despite its world-beating mine output. Which given how
panicked Beijing is about growth, might perhaps put its friendly policy
towards gold at risk.
China
began de-regulating gold prices and trading in 2002. On best estimates,
annual demand by weight trebled over the following decade, even as Renminbi prices did the same. Because allowing private
sales of gold (and silver) to boom has enabled China to diversify its
national savings (this is still a Communist state, remember) not only out of
the Dollar, but also outside equities and over-priced real estate. So as you
can see on BullionVault's chart above, the net
effect outpaced even the surge in household savings – itself a function
of China's galloping GDP growth – to take the proportion of new Chinese
wealth stored in gold from a peak of 0.9% in 2004 to perhaps 2.5% in 2011.
No,
Chinese households don't love gold quite as much as India gold buyers just
yet. India's love of gold saw its 2010 demand equal some 2.6% of GDP
– a huge drag on the country's trade balance, since it has no domestic
mine output, unlike world #1 China. When global gold prices dropped 20% from
their all-time highs in late 2011, the collapse of the Indian Rupee meant the
world's heaviest buyers couldn't step up, not even amid the traditionally
strong Diwali and wedding-season periods.
No
one expects the Renminbi to sink like the Rupee,
however. Unwinding China's newly-enabled love of physical gold would be
equally disastrous, politically, as well. But is it mere coincidence that,
just ahead of the traditionally strong gold buying season of Lunar New Year, Bejing moved to shut down all
gold trading exchanges other than the officially-recognized Shanghai Gold
Exchange and Shangai Futures Exchange?
A
neatly controlled and officially approved gold rush has been very welcome to
date. Any hint of panic buying, in contrast, might perhaps remind Beijing
just a little too much of what's been happening in
the neighboring, gold-heavy and equally Communist
state of Vietnam.
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