Matching the entire gold holdings of Chinese language retail consumers, banks and the PBOC towards manufacturing and import figures, analyst Chen Lengthy sees a niche that doesn’t add up.
As the worth of gold reached an all-time excessive in Might, many individuals believed that China was the dominant drive behind the rally. A extensively quoted truth is that the Folks’s Financial institution of China (PBOC) elevated its gold reserves for 18 straight months. Chinese language gold reserves have gone up by 10.16mn ounces (or 316 tonnes) from October 2022 to April 2024, reaching 72.8mn ounces (or 2,258 tonnes). In 2023, the PBOC purchased 231 tonnes.
Gold not that vital in China’s reserves
Nevertheless, neither the scale nor the expansion of the PBOC’s official gold reserves is especially massive. To place it into perspective, regardless of having the world’s largest foreign exchange reserves, China’s gold reserves are solely the fifth largest, barely behind Russia’s. Gold nonetheless solely makes up barely lower than 5% of the PBOC’s whole official reserves. The US tops the record with over 8,000 tonnes of gold reserves. Germany and Italy have the second and third largest reserves.
A extra compelling determine is that China’s general gold demand is persistently robust. China imported over 1,400 tonnes of gold in 2023, making it the biggest gold importer on the earth. It exports a negligible quantity, so internet gold imports are nonetheless about 1,400 tonnes. China can be the world’s largest gold producer, producing 375 tonnes final yr.
The large 4 banks lower their holdings up to now two years from 2,064 tonnes to 785 tonnes, with Financial institution of China slicing probably the most by 533 tonnes, and the smaller banks have lower theirs as nicely.
The majority of China’s gold demand comes from retail shoppers, within the types of jewelry, gold bars and cash, as gold is culturally very talked-about in China. In line with the World Gold Council, Chinese language shoppers bought 910 tonnes of gold in 2023, 121 tonnes greater than in 2022. That is nonetheless nicely under the demand of ten years in the past, nonetheless. In 2013, Chinese language shoppers purchased a document 1,346 tonnes of gold.
An oft-overlooked large participant is the Chinese language industrial banks. Gold imports are strictly regulated by the PBOC, and the banks are among the many only a few entities that maintain licenses to import gold. Seventeen A-share listed banks have reported their treasured metals holdings, together with the massive 4 state-owned banks. On the finish of 2023, they’d RMB 453bn in treasured metals, principally gold. This equates to roughly 1,016 tonnes of gold.
Nevertheless, their gold holdings have declined massively up to now two years, down about 700 tonnes in 2023 and 600 tonnes in 2022, solely rebounding barely in Q1 2024. The large 4 banks lower their holdings up to now two years from 2,064 tonnes to 785 tonnes, with Financial institution of China slicing probably the most by 533 tonnes, and the smaller banks have lower theirs as nicely.
In actual fact, the quantity of gold held by Chinese language industrial banks has been falling since 2016, when whole holdings peaked at over 3,000 tonnes. The primary large drop happened in 2018, when whole holdings fell by 30% to only 2,000 tonnes. They stabilised at that degree for a number of years, earlier than seeing additional large drops in 2022 and 2023.
… quite a lot of the rise in Chinese language retail purchases of gold bars and jewels can most likely be defined by the truth that individuals can not purchase gold-linked monetary merchandise on the banks.
The current reductions have been triggered by the industrial banks slicing commodity-linked derivatives companies for retail prospects. Financial institution of China confronted lawsuits in 2020, when crude oil costs fell into damaging territory, inflicting large losses for retail traders who purchased its merchandise linked to grease costs. That story ended with settlements. Financial institution of China needed to share quite a lot of losses and was punished by the regulators.
Since then, the regulators and banks have been far more cautious with by-product merchandise linked to commodity costs. The then-chairman of the banking regulator publicly warned in 2021 that “individuals who speculate on international change or gold could have a tough time getting wealthy”. The identical yr, a number of massive banks moved to tighten companies for retail traders to purchase gold. Some banks have utterly suspended these companies.
Thus, quite a lot of the rise in Chinese language retail purchases of gold bars and jewels can most likely be defined by the truth that individuals can not purchase gold-linked monetary merchandise on the banks. In consequence, the entire gold holdings of Chinese language retail consumers, banks, and the PBOC truly solely rose by 431 tonnes in 2023. On the similar time, China’s whole gold manufacturing and internet imports have been about 1,775 tonnes final yr, leading to a niche of over 1,300 tonnes. This hole represents the quantity of gold that has “gone lacking” from the figures.
It is not uncommon to see gaps between these figures, however they’re often inside a number of hundred tonnes at most. Such an enormous hole is uncommon. The final time we noticed one this large was in 2018, when the hole was over 2,000 tonnes. Between 2019 and 2021, the gaps have been fairly small, earlier than widening once more in 2022.
In 2022, China’s internet gold imports and manufacturing totalled 1,639 tonnes, whereas retail and PBOC purchased 853 tonnes and the industrial banks lower gold by 600 tonnes, making the hole 1,382 tonnes. Which means that a complete of two,700 tonnes of gold has gone lacking in China up to now two years, and that is greater than half of annual world gold manufacturing.
If the two,700 tonnes of lacking gold from the previous two years all belongs to the PBOC, that might double its said gold reserves to just about 5,000 tonnes.
The entire worth of the “lacking” gold from the previous two years is about US$200 billion at the moment. That is a lot that it’s unlikely that one mysterious purchaser holds all of it. There are a number of potentialities that would clarify the place it has gone.
The primary chance is that the PBOC is shopping for greater than it’s disclosing. On this situation, if the PBOC has massively elevated its gold place, it might wish to withhold a full disclosure with the intention to keep away from stunning the market. It’s within the PBOC’s curiosity to diversify its US$3.4 trillion reserves away from the US greenback, given the confrontation between the US and China. It’s believed that the USD nonetheless accounts for over half of its official reserves.
The PBOC has not at all times disclosed its gold reserves on time. In June 2015, the PBOC disclosed a one-off improve of 621 tonnes. No person believed that it purchased that a lot gold in a single month, and most assumed the determine represented a delayed disclosure of earlier purchases. If the two,700 tonnes of lacking gold from the previous two years all belongs to the PBOC, that might double its said gold reserves to just about 5,000 tonnes.
In spite of everything, the sovereign wealth fund could not wish to put all its cash in US {dollars} both, however the China Funding Company doesn’t disclose how a lot gold it owns.
The PBOC simply introduced that its gold reserves stayed flat in Might, the primary month they haven’t elevated since October 2022. It’s doable that the gold reserves didn’t improve final month as a result of costs have gone up a lot, and the PBOC has purchased quite a bit anyway. It’s also doable that it needed to ship some damaging alerts to deliver down the worth of gold in order that it could possibly purchase extra at decrease costs.
The second chance is that there are different consumers we don’t see. As an example, it’s not inconceivable that the sovereign wealth fund could have additionally purchased some gold, following the PBOC’s lead. In spite of everything, the sovereign wealth fund could not wish to put all its cash in US {dollars} both, however the China Funding Company doesn’t disclose how a lot gold it owns.
The third chance is that the banks’ discount of gold holdings has been overstated and households’ purchases of gold have been understated. Whereas the home banks have reported a giant discount of gold property, some traders could have turned to the international banks who even have gold import licenses. They could have elevated their gold holdings with out making disclosures, though we doubt that such will increase might utterly offset the decline of gold holdings on the Chinese language banks.
