Gold Glitters in China
Last week, the People’s Bank of China (PBoC) announced that it increased the country’s gold reserves for the ninth consecutive month in July. The central bank added 23 tons last month, lifting total stockpile volumes to 2,137 tons.Gold imports to China totaled 792 tons in the first half of 2023, up by 98 percent year-over-year. However, gold imports slowed on a month-over-month basis in June, tumbling by 29 percent to 98 tons.
The industry body also anticipates that other central banks, which have been some of the biggest gold buyers over the past 18 months, will continue to bolster their yellow metal inventories.
“Seven in ten respondents believe that global gold reserves will rise over the next 12 months—a significant increase from last year’s survey,” the organization stated. “As such, we remain optimistic on central bank gold demand over the coming quarters, although it is unlikely to match the levels of demand seen in H2 last year.”
ING analysts purport that the PBoC and other central banks have been scooping up gold as it is an attractive asset “in times of instability.”
Meanwhile, Beijing has complemented its gold-buying binge with more robust mining output.
In the first quarter of 2023, Chinese gold mining production rose 3 percent year-over-year “due to a combination of factors.”
“The COVID disruptions experienced during Q1’22 were absent, and it appears that output was less disrupted by seasonal factors this year,” the WGC explained. “Ongoing consolidation of the China mining industry is leading to improved operating practices that reduce the impact of harsh winter weather on mining.”
Overall, demand in China and other Asian countries is strong, with China and India accounting for about 50 percent of gold consumption.
Bloomberg reported in October 2022 that immense volumes of gold had been withdrawn from New York and other Western financial centers and were shipped east to satisfy demand in Shanghai’s gold market.
There has also been speculation that China is buying gold in preparation for war.
And Russia, following its invasion of Crimea in 2014, resulting in U.S.-led sanctions, had been amassing huge volumes of gold and had initiated a de-dollarization campaign. With gold accounting for a large portion of Moscow’s war chest, the Kremlin has been able to mitigate the pain of being ousted from international financial markets.
China Sipping on Texas Tea
Despite a sluggish economy—second-quarter GDP came in at a lower-than-expected 6.5 percent, and the manufacturing sector has been stuck in contraction territory for four consecutive months—China has been boosting its oil purchases.In July, China imported an average of 10.29 million barrels per day (bpd) of oil, up by 17 percent from the same time a year ago. On a month-over-month basis, this was down from the previous month. However, crude imports in June totaled 12.67 million bpd, up by more than 45 percent year-over-year.
Domestic gasoline supplies tumbled by about 3 percent from June to July, and diesel stockpiles rose by about 2 percent during this span.
“Despite a slow return from COVID lockdowns and low overall demand, China is importing almost record levels of oil and upping its domestic oil production to near record levels, both due to ensuring energy security,” the IER wrote.
Natural gas has also played an integral role in the country’s energy security efforts. China is poised to become the world’s top liquefied natural gas (LNG) importer this year as companies plan to buy more of the energy commodity long-term.
China has been constructing a dozen new import terminals, which could lead to LNG imports’ doubling from current levels to 138 million tons by 2033, according to Rystad Energy.
However, strengthening Chinese demand could prove to be a headache for other LNG markets, particularly Europe.
Stagnation
Even with the vast purchases of energy and metals, market analysts anticipate that the Chinese economy could stagnate heading into 2024.“Shattered investor and consumer confidence, shrinking demographics, property crisis, and deflation hints that the Chinese economy could be on the path for a longer period of economic stagnation. We could therefore see a rapid pullback in investor optimism regarding stimulus measures and their effectiveness,” Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, said in a daily research note.
China’s trend rate of growth has eased to 3 percent this year, down from 5 percent before the pandemic, according to Capital Economics’ China Activity Proxy.
With strategists expecting authorities to employ more fiscal and monetary stimulus measures in the coming months, will officials continue to purchase enormous amounts of gold and crude oil?