Posts Tagged ‘seasonality’
If you trade copper, aluminum or tin, or Australian iron ore equities, then every muttering of a Chinese official may make or break your day. You follow religiously the spread between Shanghai and LME prices and plough through the construction numbers in Anhui. But now the country that gave us a suite of graceful oxymorons – from “agrarian communism” to capitalism without capital markets – is encroaching on the sanity of gold investors as well.
How should it be otherwise? When you already own eight apartments in Wenzhou, three ambitious mistresses and a gleaming black Buick with a chauffeur, what else is there to impress your peers than a solid gold toilet, in the aptly gaudy style known from Hong Kong exhibits or the recent Shanghai Expo. For the rest of us math majors, the equation goes: “more solid gold toilets – better for the gold market”. Then multiply it by 1.3bn and you attain nirvana.
The attractiveness of gold toilets has as much to do with the delicate tastes of the ‘xinfu’ (nouveaux riches), as it has with the paucity of gold investment products in China. Not surprisingly, this week’s announcement about the widening of gold trading in China has created quite a stir, helping gold test the elusive $1200/oz level again.
China’s reform of the internal gold market has been painstakingly slow. Although the government monopoly was broken in 2001 and Shanghai Gold Exchange opened a year later, for the first four years SGE served exclusively the jewelry market. Only in 2006 were individual investors put on a “trial method” to trade 100kg bars. It took two more years for CSRC to treat favorably the application to open up the futures market. Nearly 7m gold futures were traded on Shanghai Gold Exchange in 2009. This has been a helpful development for Chinese gold producers, who are not allowed to export gold mined in China. Yet some of the gold mined in China finds its way through bank swaps into Hong Kong market. The announced launch of Hong Kong Mercantile Exchange and its gold futures contract represents a (healthy) competitive threat to SGE. SGE could counter this partly by allowing in foreign participants on the exchange, but any such allusions are, for the time being, a matter of bureaucrats’ “opinion”, not policy.
Meanwhile, in the absence of ETF products, most individuals on the mainland rely on popular coins (golden pandas and Olympic coins) and bars. In fact, China is now the world’s fourth largest market in terms of coin and bar hoarding.
The PBOC’s announcement called for better financing services to facilitate Chinese banks’ hedging overseas. It is impossible to divorce such statements from the problem of the closed China’s capital account and the tortoise-like internationalization of the renminbi. PBOC faces an unsolvable dilemma. Further boost to renminbi’s global role would mean progressive loss of control over its value. On the other hand, readiness for such a move would require a comprehensive plan over how to grow the economy of a post-mercantilist China. There does not seem to be such a plan at the moment. As a result, only 1% of China’s international trade is settled in renminbi and only 4 (four !) renminbi bonds have been issued by non-residents. Open cross-border trading of gold is as distant a future for Chinese investors as is renminbi’s full convertibility.
For all this skepticism, the decision to modernize China’s gold investment market should be applauded. Investment demand represents 18% of overall gold offtake in China and the potential for growth remains significant. Neighboring countries such as Korea and Taiwan have a per capita consumption nearly four times the Chinese level. This contrast is comparable to the overall differences in terms of GDP per capita. Should China continue to grow faster than the rest of East Asia, its gold demand will grow accordingly.
But even if ETFs and other investment products outweigh the importance of golden toilets, China will, in foreseeable future, remain predominantly a gold jewelry market. Whereas the global jewelry consumption now accounts for roughly half of the total demand, Chinese appetite for jewelry ensures that as much as 78% of all gold sold appears in ornamental form.
This brings us back to one of the key considerations of a self-respecting gold investor. China’s jewelry market exhibits a strong seasonality of its own, with most purchases made in September, November and January. In the near term, the recognition of the impact of these flows holds much more importance than any exegesis of PBOC’s mutterings.
Tags: China gold market, Chinese gold demand, PBOC, renminbi, seasonality, Shanghai Gold Exchange