2018 China Gold Demand Up, Supply Down

Posted | 06/02/2019 / Views | 4420
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China is not exactly known for its transparency, particularly when it comes to its precious gold.  For many years its central bank (Peoples Bank of China) reported meagre gold in its reserves of 1054 tonne.  Along came the desire to be part of the IMF’s SDR (Standard Drawing Rights), a basket of the world’s leading currencies (USD, EUR, YEN, GBP and of course now the RMB (Yuan)) that some believe is destined to be the world’s next reserve currency.  A seat at that table requires a number of hurdles to be met, but one is a prescribed substantial gold holding.  Funnily enough that quickly happened and China had the Yuan accepted into the SDR in 2015.  They currently declare official gold holdings of 2125 tonne, just enough to get them in.  As we wrote back here, “most analysts believe ‘the rest’ is held by SAFE (State Administration of Foreign Exchange) and undisclosed for strategic reasons.  Estimates range from 5,000 to 20,000 tonnes but no one knows.” 

Part of the transparency problem is also what they declare from a demand perspective as it doesn’t appear to add up when you look at the numbers objectively.  Its why a lot of people use the total consumption via the Shanghai Gold Exchange, through which all gold in mainland China goes, as the proxy.  It’s not perfect as it can get muddied with inter bank transactions but appears the most robust and logical.

Irrespective, China is indisputably the world’s largest consumer and largest producer of gold.  The following article by industry stalwart Lawrence Williams, discusses these figures and reports that 2018 saw both Chinese demand increase and supply decrease.  It’s a well worthwhile read.

“China is key to world gold supply and demand as both the world’s largest consumer of the metal and the world’s largest producer.  What should be encouraging for gold followers is that last year, according to the China Gold Association, demand rose by around 5.7% to 1,151 tonnes, despite a slowdown in the growth of the Chinese economy.  Meanwhile the country’s gold production fell by around 6% to a fraction over 401 tonnes which means that China remains the biggest contributor to any possible plateauing, or falling off, in global gold output (peak gold).

Chinese gold consumption figures are always tough to correlate, and always seem to fall short of apparent known gold imports from countries/regions which announce detailed gold export statistics like Switzerland, Hong Kong, the UK, the USA and Australia plus the nation’s own production, plus an allowance for scrap and unknown imports from counties which do not provide breakdowns of their gold trade figures,  We thus tend to utilise Shanghai Gold Exchange (SGE) gold withdrawal figures as a proxy for the country’s overall demand and these came to a little over 2,000 tonnes in 2018, marginally higher than in 2017 (See: Chinese gold demand falters but still up y-o-y - just).

Assuming the SGE gold withdrawals total is accurate as a proxy for real Chinese demand there is thus a considerable gap of around 900 tonnes between the assessed demand as put forward by the China Gold Association and an annually calculated figure for Chinese gold inflows.  This balance could be going into the coffers of the commercial banking system, or perhaps into unreported holdings by the Chinese central bank/government!  Given that the Chinese commercial banks are state-owned this could actually be one and the same thing!

Also, because China prohibits gold exports, what goes into China stays there and emphasises the ever-continuing flow of gold from West to East

German bank, Commerzbank, has noted that Switzerland got close last year to replacing Hong Kong as the largest exporter of gold to China, but this is a bit of a contentious assessment given that Switzerland is also the biggest gold exporter to Hong Kong itself.  Indeed if we look at ‘Greater China’ as we see it - in other words Mainland China plus Hong Kong, total Swiss gold exports last year to the two combined was a massive 729.1 tonnes.  If one adds China’s own gold output of just over 401 tonnes last year to this Swiss import total it accounts for close to the China Gold Association’s figure for total Chinese consumption even without any additional direct exports to ‘Greater China’ from other known direct gold suppliers like the UK, the USA and Australia, let alone exports from other unknown sources, plus internal scrap gold conversion.  

That is why we do not consider China Gold Association figures for China’s annual gold consumption - or the somewhat similar figures which are put out by major gold analytical consultancies like Metals Focus, CPM Group and GFMS, as being fully representative of the true picture for annual gold flows into Mainland China.  Now maybe utilising SGE gold withdrawals as a proxy for total Chinese gold absorption is also a little inaccurate, but it is far closer to the annualised data for real gold flows into China than other figures which are available. - and these annual SGE totals are directly comparable year on year which gives us a better handle on how real Chinese gold flows are holding up, or otherwise.  

On this basis Chinese true gold absorption is holding up well so far despite any impact of the ‘trade wars’ with the USA and a perceived reduction in annual Chinese GDP growth. The key word here is growth.  The Chinese economy is almost certainly not growing as fast as it was at the beginning of the decade, but it still appears to be growing and as long as there is growth then the potential remains for increasing gold absorption, while, by all accounts global gold supply is plateauing, or perhaps turning down.  As long as this supply/demand pattern continues, prospects for a slow and steady gold price rise remain intact.”