China has long been one of the major buyers of physical gold. China abruptly ended its zero-COVID policy in early December and began reopening its economy. What could this mean for the gold market? And, has this re-opening provided an uplift in Chinese gold demand?
China has long been one of the major buyers of physical gold. Since overtaking India as the world’s largest gold consumer in 2013, China contributed an average 31% and 24% to global annual jewelry and bar & coin demand respectively between 2013 and 2019.1 However, as the Chinese economy felt the impact of its zero-COVID policy and strict COVID lockdowns, the country’s contribution to jewelry and bar & coin demand fell to 29% and 21%.2 China abruptly ended its zero-COVID policy in early December and began reopening its economy. What could this mean for the gold market? And has this re-opening provided an uplift in Chinese gold demand?
Figure 1: Chinese Wholesale Gold Demand Shows Signs of a Rebound in Recent Months
While it has only been four months since China scrapped its zero-COVID policy, the latest gold trends in China appear encouraging. To assess the strength of Chinese gold demand, examine physical gold withdrawals from the Shanghai Gold Exchange’s (SGE) vaults. Withdrawals from SGE vaults are a key measure for gauging Chinese wholesale gold demand since withdrawals can only be initiated by members of SGE — which include large buyers of physical gold such as financial institutions, gold dealers, and jewelry manufacturers. Based on the latest available data, SGE members withdrew 157 metric tons (t) of gold in March 2023,3 continuing February’s strong demand. This was the largest monthly withdrawal since September, and provides some early evidence that China’s reopening has created an uplift in Chinese gold demand.
Since reopening, China has also resumed reporting its gold purchases at the central bank level. The People’s Bank of China (PBOC) reported an increase of 32 t in November, the first noticeable increase since September 2019. PBOC reported additional consecutive purchases of 30 t, 15 t, 25 t, and 18 t between December and March. That brings total purchases between November 2022 and March 2023 to 120 t, boosting its gold reserves from 1,948 t to 2,068 t.
This represents a 6.2% increase in just over five months. To put this into context, China purchased 93 metric tons of gold in total in 2019, before the Chinese government stopped reporting its gold purchases in Q4 2019.
We believe the surge in geopolitical tensions is one of the key reasons why China has recently become more aggressive with its gold purchases. Adding gold to their reserves should increase international stability and creditability for the domestic economy and local currency for the potential use of their Cross-border Interbank Payment System (CIPS) to settle international trades.
Figure 2: China Has Reported Five Consecutive Months of Gold Purchases
According to the World Gold Council’s 2022 Central Bank Gold Reserves Survey, economic concerns such as inflation and geopolitical instability may have contributed to the growing demand from emerging market and developing economies and are now the major reasons behind the reserve management decisions of the central bank respondents.
At the recently held National People’s Congress in March, China announced plans for a consumer-led revival of the Chinese economy and set an annual growth target of 5% for 2023, after 2022 growth came in at 3%, one of the slowest rates since the mid-seventies. The Chinese government’s main priority will be to boost consumer spending by increasing household incomes — which included a target to create 12 million more urban jobs. The International Monetary Fund (IMF) predicts China’s economy is likely to rebound to 5.2% in 2023, with household spending and manufacturing business activities to recover after abandoning the zero-COVID policy.4
The post-COVID government policy to support a consumer-led economy should continue to position China as one of the world’s most important markets for gold consumption. We anticipate that Chinese citizens may gravitate toward gold in the near term to build and protect wealth, driven by a deteriorating economy, and to hedge against the relatively poor performance of the Chinese stock markets since 2020. The markets have been negatively impacted by the lockdowns as well as Beijing’s actions to crack down on certain sectors.
Expectations for growing investment and consumer demand in China post the zero-COVID strategy — in addition to a growing need by global investors and central banks to manage market shocks and geopolitical risks — should be positive for the gold market in 2023 and beyond.
Figure 3: China Sets 5% Growth Target for 2023 to Revive Chinese Economy
1World Gold Council Global Demand Trends, 2013 – 2022.
2World Gold Council Global Demand Trends, 2013 – 2022.
3Shanghai Gold Exchange https://en.sge.com.cn/
4“China’s Economy is Rebounding, But Reforms Are Still Needed,” Diego A. Cerdeiro and Sonali Jain-Chandra, International Monetary Fund, February 3, 2023.
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