In February, Hong Kong exported39,668 kilogramsof gold to Mainland China, up from 32,948 kilos in January. In the first two months of this year, the city shipped almost seven times the amount of gold to China than in the same period in 2011.
Beijing does not release gold import figures, so for this and other reasons the Hong Kong numbers are considered the best indication of the trend of China’s outside purchases of the commodity. Observers think the Mainland imports about half its gold through that port.
So who is doing all the buying? The accepted narrative is that the People’s Bank of China is the major force behind the country’s growing demand for the yellow metal. The theory has been fueled by the central bank itself. “No asset is safe now,” said the PBoC’s Zhang Jianhua at the end of December. “The only choice to hedge risks is to hold hard currency – gold.” He also said it was advantageous to buy on market dips. Analysts naturally jumped on his widely quoted comments as proof that China is in the market for even more of the metal.
Many gold bugs believe that Beijing, attempting to make the renminbi the world’s reserve currency, will decide to go on the gold standard to give it credibility. International Monetary Fund rules prohibit member states from pegging their currency to the metal, but that has not quelled speculation. If China were to adopt the gold standard, it would be great for gold prices because China would have to buy tens of thousands of tons of it, depending on the rate of pegging.
The gold standard theory has some support. Clearly, the Chinese are trying to dethrone the dollar.
Yet don’t expect Beijing to start pegging to gold anytime soon because, in order to become the world’s reserve currency, the yuan, as the renminbi is informally known, would need to be freely convertible.
Beijing says it’s behind that reform. Zhou Xiaochuan, speaking to Caixin in December, predicted that the renminbi will be fully convertible soon. “We are now not too far from our goal of capital account convertibility,” the outgoing chief of the central bank told the influential Chinese magazine. Today, the currency is convertible only on the current account.
Gold enthusiasts should not take too much comfort from Zhou’s statement. For more than a decade Chinese officials have been promising to eliminate all convertibility controls. Yet even if Beijing were serious this time, it cannot take that step unless it has, beforehand, fundamentally restructured its growth model.
The Chinese model, as presently constituted, is incompatible with complete currency convertibility. As long as Beijing depends on investment fueled by cheap money to create growth, it must maintain its controls. If it did not maintain them, China’s savers would seek higher returns in other countries and already weak state banks would then become illiquid. At this time, it will take years to get China’s banks and markets in shape for unregulated flows of currency.
So capital account convertibility is not on the horizon. Currency reform, unfortunately, is no closer than it was at the beginning of this century.
But China does not need to go for the gold standard in order to support gold prices. As Jeremy Friesen of Société Générale in Hong Kong pointed out this month, “On the public level, China’s central bank will continue to accumulate gold, which is easier than liberalizing their capital account and currency.” By this the commodity strategist meant that Beijing could appreciably increase the general appeal of holding its currency if speculators and others thought that it was backed by a hoard of the precious metal.
This interpretation is backed up Zhang Jianhua’s comments, which were seen as implied criticism of the dollar. So can gold bugs be sure that China will support the yellow metal with purchases in the coming months?
There is one problem. With the Chinese economy faltering at the moment – it’s much worse than official numbers portray – Beijing has more important things to do than dress up the renminbi with gold purchases.
Gordon G. Chang will present a keynote address on “Will China Continue to Buy Asian Commodities?” on Monday, May 14, during the New York Hard Assets Investment Conference.