News reports flooded the precious metals news websites that China has drastically increased its quota on how much gold that nation’s banks can import.
China’s official import data shows that China imports of gold started declining in 2019 then dropped significantly during the COVID-19 pandemic 2020 and the first quarter of 2021.
China’s Economic Growth at 10 Year High
China’s economy is now recovering and expected to post its fastest growth in 2021 than in more than a decade. Reports show that gold jewellery sales in China during the Lunar New Year holiday was stronger this year than in either 2019 or 2020. This has led to a climbing premium as retailers scrambled to restock gold.
China’s annual gold consumer demand accounts for around 30% of total global gold consumer demand. To put China’s consumer spending on gold into perspective. For each US$100 of household spending, Chinese households spend approximately US$1 compared to less than US$0.1 (or less than 10 cents) for the OECD countries on gold purchases. Households in India dedicate approximately $3 per $100 of income to gold purchases. These spending levels might seem low but note that there are approximately 455M households in China. 250M households in India, and 440M households in the OECD (2018 data).
Not only do consumers in China purchase gold but the Chinese Central bank has also large gold holdings. With official gold reserves reported to the IMF of more than 62 million ounces as of the end of March. With the exception of June 2015 to October 2016 when China was actively working to get its currency accepted as one of the official currencies in the IMF’s SDR (Special Drawing Rights) basket which occurred in September 2016. China has only very sporadically reported its official gold reserves with large gaps in between.
The last official increase was reported in September 2019, at that time China’s official gold reserves totaled 62M ounces or approximately US$110 billion at current price levels. (Note, the US Fed has the largest official gold holdings at 261M ounces.) In addition to these officially reported holdings, it is speculated that the Chinese government holds additional gold in other sovereign funds.
China’s Holdings of US Treasuries Falls
Central banks hold gold for many of the same reasons as individuals. One of the most publicized reasons that both China and Russia have touted as a reason to increase their official gold reserves is to diversify from US dollars, euros, and other fiat currencies.
China’s holdings of US Treasury Securities surged after its acceptance into the World Trade Organization (WTO) in December 2001. An event that proved to be a massive turn in world production to China with increased exports to the rest of the world, namely the US. The US dollars received back to China for purchases of Chinese goods were then invested in US Treasuries.
As a result, China is one of the largest foreign holders of US Treasury Securities. Since peaking in 2013 China’s holdings of US Treasury Securities has slowly declined. As of February 2021, China’s US Treasury holdings totaled just over US$1.1 trillion. China’s desire to diversify these holdings away from US dollars is well known. Especially after the tariffs and trade war with former President Trump.
The slowdown in China’s economic growth and liquidity problems over the last few years has slowed this process. But now that the economy is recovering at a rapid rate, China is likely to resume the diversification of US dollar denominated holdings. The official gold purchases are also likely to resume. The combination of increased consumer demand in China and increased official reserve demand will help support the gold price further for the next few years.