“Growth has replaced inflation as Beijing’s top policy concern,” says Qu Hongbin, Asian economics expert at HSBC in Hong Kong, forecasting three cuts to China’s banking-reserve requirements by July 2012.
“There is developing in Beijing, I think, almost a panic about global economic prospects and the impact of the European crisis on China,” agrees Michael Pettis, a finance professor at Peking University. He goes one step further and forecasts at least a debate over — if not action on — a currency devaluation in 2012.
Yes, you read that right: In a U.S. election year, Beijing’s policy wonks are arguing about cutting the yuan’s foreign-exchange value, not raising it.
China’s stellar growth since joining the World Trade Organization a decade ago has, of course, been driven by the export of cheap goods to the rest of the world. And to move sales along, the People’s Bank, of course, keeps the yuan (aka the renmimbi) closely pegged to the dollar, thus ensuring that devaluation by the U.S. Fed can’t price Chinese goods out of the market.
“Within China,” Pettis now believes, “many are going to argue that the rapid decline in the trade surplus, coupled with unmistakable evidence of flight capital, means that the People’s Bank of China should devalue the renmimbi.”
Flight capital? The tide of cash in renminbi accounts — after the clamor to get in ahead of the currency’s widely assumed and hotly politicized rise — just recorded its first back-to-back months of outflows since 2000. Analysts guess that’s because the previously widespread certainty of an upward revaluation is now off the table. Beijing is encouraging that view.
“Exports are set to slow [in 2012],” said Shen Danyang, a spokesman for the Ministry of Commerce, in mid-December. “We will further accelerate reforms to…make overall trade remain a positive contribution to the economy.”
Such reform cannot mean a rise in the yuan — not if overall trade is to continue adding to GDP. That only confuses the picture for gold investment and jewelry demand in China, now the second-largest market after India, the world’s perennial sink for physical gold.
That’s quite a chunk, however you weigh it. China’s full-year 2010 imports are estimated to have been some 245 tons. Domestic gold-mining production (now the biggest in the world, and trapped by a ban on gold exports) totaled some 340 tons. Already last year, record monthly gold imports from Hong Kong in October had led one analyst, Tom Kendall of Credit Suisse, to forecast total 2011 imports of perhaps 490 tons. That would be double the 2010 total by weight. It would represent a 150% rise in Chinese gold imports by yuan value and come on top of the 10% rise in domestic gold-mining output, to 375 tons, forecast in August by the Ministry of Industry & Information Technology.
Ever-more Chinese wealth, in short, is going to gold, and, coupled with most Chinese households’ fear of inflation, this new debate about actively devaluing the currency means gold-investment demand is only likely to rise further. That would depress China’s trade surplus, despite its world-beating mine output. So, given how panicked Beijing is about growth, its friendly policy toward gold could be at risk.
China began deregulating gold prices and trading in 2002. By best estimates, annual demand by weight tripled over the following decade even as renminbi prices did the same. Allowing private sales of gold (and silver) to boom has enabled China to diversify its national savings (this is still a communist state, remember) not only out of the dollar but also out of equities and overpriced real estate. So as you can see on BullionVault‘s chart above, the net effect outpaced even the surge in household savings — itself a function of China’s galloping GDP growth — to take the proportion of new Chinese wealth stored in gold from a peak of 0.9% in 2004 to perhaps 2.5% in 2011.
Chinese households don’t love gold quite as much as Indian gold buyers do just yet. India’s love of gold saw its 2010 demand equal some 2.6% of GDP — a huge drag on the country’s trade balance since India has no domestic mine output, unlike world No. 1 China. When worldwide gold prices dropped 20% from their all-time highs in late 2011, the collapse of the Indian rupee meant that the world’s heaviest buyers couldn’t step up, not even during the traditionally strong Diwali and wedding-season periods.
No one expects the renminbi to sink like the rupee. Unwinding China’s newly enabled love of physical gold would be disastrous politically as well financially. But is it mere coincidence that just ahead of the traditionally strong gold-buying season of the Lunar New Year, Bejing moved to shut down all gold-trading exchanges other than the officially recognized Shanghai Gold Exchange and Shangai Futures Exchange?
Beijing’s neatly controlled and officially approved gold rush has been very welcome to date. Any hint of panic buying, in contrast, might perhaps remind Beijing just a little too much of what’s been happening in the neighboring, gold-heavy and equally communist state of Vietnam.
Adrian Ash is head of research at BullionVault.