If China’s love affair with gold was set to music, it might well be to 70s duo The Carpenters. The message from day one of this year’s London Bullion Market Association conference – being held this week for the first time in Hong Kong – was clear: when it comes to China and gold, we’ve only just begun.
Although China’s economic slowdown has sapped demand for some commodities, such those related to construction, appetite for the yellow metal is an altogether different story.
In the first half of this year, explained Albert Cheng of the World Gold Council, a lobby group for global gold miners, China overtook India to become the world’s top consumer of gold. In 2007, China was responsible for just 10 per cent of global demand – by 2011 it had already grown to 21 per cent.
There are plenty of factors that have driven the increase. The growth of trade on the Shanghai Gold Exchange, the relaxation of gold ownership rules, and the spread of gold-related investment products to the tens of thousands of bank branches across China have all helped tap into demand created by increased wealth and macroeconomic uncertainty.
The dramatic rise in the price of gold in recent years – at a time when the Chinese equity market has stagnated – also helped fuel the huge popularity enjoyed by gold investments on the mainland. And the fact that many in Asia treat the metal as a second currency holds particular significance in a country with such strict controls on the exchange rate of the renminbi.
But, said Zheng Zhiguang, general manager of precious metals at ICBC, despite annual growth in demand of around 14 per cent, the gold market in China is “only just beginning”. In fact, China’s gold market could be “entering a period of more sustained and steady growth”, thanks to improved investment access and rising incomes.
A recent pronouncement at the Chinese Communist Party Congress in Beijing that the government will seek to double per capita income by 2020 from 2010 levels certainly adds fuel to that argument. Even during China’s slowdown, labour has still been in short supply thanks to the aging population, boosting salaries across the country in both blue and white collar jobs.
And it isn’t just Chinese investors that have bullion bulls salivating, it’s the government too. China currently keeps just 1.5 per cent of its reserves in gold, according to the WGC. That compares with 70 per cent or more in some European countries and the US. As LBMA chairman David Gornall put it, “that allocation can only go in one direction”.
Speculation is that the launch of a gold ETF (exchange-traded fund) in China could give the market a further boost.
However – as with the global economy – Chinese appetite is unlikely to be the cure-all that some hope. The price of gold has barely risen this year, with demand in India – the other big consumer market – falling in line with its own painful economic slowdown.
Although Chinese New Year is growing in importance, gold watchers still need to keep Diwali – the Indian festival of light and the peak gold buying season – firmly etched in their calendars. Coincidentally, it begins on Tuesday.