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The mysterious gold buyer in China
As the price of gold reached an all-time high in May, many people believed that China was the dominant force behind the rally. A widely quoted fact is that the People’s Bank of China (PBOC) increased its gold reserves for 18 straight months. Chinese 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 bought 231 tonnes.
Gold not that significant in China’s reserves
However, neither the size nor the growth of the PBOC’s official gold reserves is particularly large. To put it into perspective, despite having the world’s largest forex reserves, China’s gold reserves are only the fifth largest, slightly behind Russia’s. Gold still only makes up slightly less than 5% of the PBOC’s total official reserves. The US tops the list with over 8,000 tonnes of gold reserves. Germany and Italy have the second and third largest reserves.
A more compelling figure is that China’s overall gold demand is consistently strong. China imported over 1,400 tonnes of gold in 2023, making it the largest gold importer in the world. It exports a negligible amount, so net gold imports are still about 1,400 tonnes. China is also the world’s largest gold producer, producing 375 tonnes last year.
The big four banks cut their holdings in the past two years from 2,064 tonnes to 785 tonnes, with Bank of China cutting the most by 533 tonnes, and the smaller banks have cut theirs as well.
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Plenum)The bulk of China’s gold demand comes from retail consumers, in the forms of jewellery, gold bars and coins, as gold is culturally very popular in China. According to the World Gold Council, Chinese consumers purchased 910 tonnes of gold in 2023, 121 tonnes more than in 2022. This is still well below the demand of ten years ago, however. In 2013, Chinese consumers bought a record 1,346 tonnes of gold.
Big banks, big players
An oft-overlooked big player is the Chinese commercial banks. Gold imports are strictly regulated by the PBOC, and the banks are among the very few entities that hold licenses to import gold. Seventeen A-share listed banks have reported their precious metals holdings, including the big four state-owned banks. At the end of 2023, they had RMB 453bn in precious metals, mostly gold. This equates to roughly 1,016 tonnes of gold.
However, their gold holdings have declined massively in the past two years, down about 700 tonnes in 2023 and 600 tonnes in 2022, only rebounding slightly in Q1 2024. The big four banks cut their holdings in the past two years from 2,064 tonnes to 785 tonnes, with Bank of China cutting the most by 533 tonnes, and the smaller banks have cut theirs as well.
In fact, the amount of gold held by Chinese commercial banks has been falling since 2016, when total holdings peaked at over 3,000 tonnes. The first big drop took place in 2018, when total holdings fell by 30% to just 2,000 tonnes. They stabilised at that level for a few years, before seeing further big drops in 2022 and 2023.
... a lot of the increase in Chinese retail purchases of gold bars and jewels can probably be explained by the fact that people can no longer buy gold-linked financial products at the banks.
(Graphic:
Plenum)The recent reductions were triggered by the commercial banks cutting commodity-linked derivatives services for retail customers. Bank of China faced lawsuits in 2020, when crude oil prices fell into negative territory, causing huge losses for retail investors who bought its products linked to oil prices. That story ended with settlements. Bank of China had to share a lot of losses and was punished by the regulators.
Since then, the regulators and banks have been much more cautious with derivative products linked to commodity prices. The then-chairman of the banking regulator publicly warned in 2021 that “people who speculate on foreign exchange or gold will have a hard time getting rich”. The same year, several large banks moved to tighten services for retail investors to buy gold. Some banks have completely suspended these services.
Thus, a lot of the increase in Chinese retail purchases of gold bars and jewels can probably be explained by the fact that people can no longer buy gold-linked financial products at the banks. As a result, the total gold holdings of Chinese retail buyers, banks, and the PBOC actually only rose by 431 tonnes in 2023. At the same time, China’s total gold production and net imports were about 1,775 tonnes last year, resulting in a gap of over 1,300 tonnes. This gap represents the amount of gold that has “gone missing” from the figures.
It is common to see gaps between these figures, but they are usually within a few hundred tonnes at most. Such a huge gap is rare. The last time we saw one this big was in 2018, when the gap was over 2,000 tonnes. Between 2019 and 2021, the gaps were pretty small, before widening again in 2022.
In 2022, China’s net gold imports and production totalled 1,639 tonnes, while retail and PBOC bought 853 tonnes and the commercial banks cut gold by 600 tonnes, making the gap 1,382 tonnes. This means that a total of 2,700 tonnes of gold has gone missing in China in the past two years, and this is more than half of annual global gold production.
If the 2,700 tonnes of missing gold from the past two years all belongs to the PBOC, that would double its stated gold reserves to nearly 5,000 tonnes.
Where has the gold gone?
The total value of the “missing” gold from the past two years is about US$200 billion today. This is so much that it is unlikely that one mysterious buyer holds all of it. There are several possibilities that could explain where it has gone.
The first possibility is that the PBOC is buying more than it is disclosing. In this scenario, if the PBOC has massively increased its gold position, it may want to withhold a full disclosure in order to avoid shocking the market. It is in the PBOC’s interest to diversify its US$3.4 trillion reserves away from the US dollar, given the confrontation between the US and China. It is believed that the USD still accounts for over half of its official reserves.
The PBOC has not always disclosed its gold reserves on time. In June 2015, the PBOC disclosed a one-off increase of 621 tonnes. Nobody believed that it bought that much gold in one month, and most assumed the figure represented a delayed disclosure of previous purchases. If the 2,700 tonnes of missing gold from the past two years all belongs to the PBOC, that would double its stated gold reserves to nearly 5,000 tonnes.
After all, the sovereign wealth fund may not want to put all its money in US dollars either, but the China Investment Corporation does not disclose how much gold it owns.
The PBOC just announced that its gold reserves stayed flat in May, the first month they have not increased since October 2022. It is possible that the gold reserves did not increase last month because prices have gone up so much, and the PBOC has bought a lot anyway. It is also possible that it wanted to send some negative signals to bring down the price of gold so that it can buy more at lower prices.
The second possibility is that there are other buyers we do not see. For instance, it is not inconceivable that the sovereign wealth fund may have also bought some gold, following the PBOC’s lead. After all, the sovereign wealth fund may not want to put all its money in US dollars either, but the China Investment Corporation does not disclose how much gold it owns.
The third possibility is that the banks’ reduction of gold holdings has been overstated and households’ purchases of gold have been understated. While the domestic banks have reported a big reduction of gold assets, some investors may have turned to the foreign banks who also have gold import licenses. They may have increased their gold holdings without making disclosures, although we doubt that such increases could completely offset the decline of gold holdings at the Chinese banks.
Source: https://www.thinkchina.sg/