China and Gold

There is a council of Chinese generals. One of them explains, “we will attack in small groups, two or three million each”.
A new global power. The world’s most populous country. One of the world’s fastest-growing economies, with the largest GDP as measured by purchasing power parity. The world’s largest exporter and second-largest importer of goods. China. What are its links with the gold market?

China’s Gold Reserves

The size of China’s gold reserves arouses many emotions. The official holdings are 1.948,3 tons (as of June 2020), the sixth largest in the world (excluding the IMF’s stockpile), and almost twice as large as a few years before, as the chart below shows.

However, many analysts speculate that China’s gold reserves might be much higher than the official number, as the People’s Bank of China had not revealed its official gold reserves for years. Hence, people speculate that China plans to use its gold reserves to back the renminbi and does not want to reveal their true level. It might be the case, but investors should remember that: a) the yuan has a long way toward challenging the U.S. dollar; b) gold accounts for merely 3.3 percent of China’s foreign reserves – even a few times larger it would not be enough to back the currency; c) the country is one of the largest official holders of U.S. assets in the world, so it is not in China’s best interest to challenge the greenback and back the yuan by gold.

China’s Gold Market

China is the largest producer of gold. In 2016, the country produced 455 tons of bullion. China is also the biggest consumer of gold: its consumption reached 975.38 tons in 2016, according to China Gold Association. Hence, China has to import a lot of bullion – indeed, the country is one of the biggest gold importers in the world. In 2015, Hong Kong imported gold worth $45 billion, of which most exported to mainland China.
However, it does not mean that China is a key player in the gold market. Why? Well, the annual gold demand and supply reported by the World Gold Council are only a tiny fraction of gold that is traded in London and New York, the largest market places for gold where the price of gold is formed. So, although the share of Chinese investors operating on these markets is unknown, we think that Western investors and Western institutions remain the key players in the gold market.

China’s Economy and Gold

Everyone knows that when the U.S. sneezes, the world catches a cold. However, the importance of China’s economy has been recently rising. One great example was 2015-2016 China’s stock market turbulence, which caused a decline in commodity and equity prices around the world, erasing more than $3 trillion in value from global stocks. The devaluation of yuan and the plunge in the Shanghai Stock Exchange during summer 2015 and later in January 2016, set off a global rout, pushing up the price of gold. However, as one can see in the chart below, there is no clear relationship between China’s stock market and the gold prices.

Another important example was the initial phase of the coronavirus crisis, which pushed China, the world’s factory hub, into the Great Lockdown, shaking the industrial foundations of the whole world.

The key takeaway is that although China is an important player in the physical gold market, its impact on the gold prices discovery process remains limited. Gold is more sensitive to the American developments, such as fluctuations in the dollar’s value or in the level of U.S. real interest rates.