China’s Insatiable Appetite for Gold – Demand Exceeds Supply

LONDON – The latest research document from the World Gold Council comes from their analyst in China, Elly Ong.  The study looks at both supply and demand in the country, concluding that the economic demographics of the country support a robust outlook for gold demand and that the sustained structural shift in Chinese gold demand and supply “potentially creates a brave new world for China’s gold industry”, with an insatiable appetite for gold that looks likely to continue while local domestic mine supply lags behind demand.  The Council expects Chinese gold demand to double over the next decade, driven primarily by jewellery and investment – with jewellery fluctuating on a cyclical basis, while investment demand has both a cyclical and a counter-cyclical element.

In the conclusion to the study, WEGC points out that “Time will tell how China will evolve, as the nation faces multiple challenges in the wake of the global financial crisis.  With ongoing uncertainties surrounding the economic recovery, currency and inflation, the search for alternative international asset choices for both investors and the central bank should, in our view and for the reasons outlined in this report, clearly involve consideration of gold.  Investors may be mindful that the volatility that we have seen in the past two years is not necessarily an isolated event and we may have to prepare for a more protracted recovery than in past cycles”.

At a more detailed level with respect to the jewellery market, WGC points out that local Chinese consumers are well aware of gold’s benefit as a store of value and that jewellery has always been regarded by Chinese buyers as an investment.  At least 80% of total gold jewellery demand in China is accounted for by 24 carat gold, but there is a shift underway towards 18-carat pieces, as younger elements of society have been attracted by these pieces, especially the “K-gold” range, which takes its design inspiration from Italy, long regarded as being in the forefront when it comes to design flair.

Chinese jewellery demand has averaged 250 tonnes of gold per annum over the past ten years.  Total jewellery+bar hoarding demand has averaged 3,355 tonnes over the same period (GFMS figures), giving China an average market share of just over 7% of total.  Last year, jewellery demand grew, in contrast to the rest of the world, by 6% year-on-year to reach 347 tonnes, which was equivalent to 21% of world jewellery demand.  This works out at 0.26 grammes per capita, substantially lower than other areas with a similar affinity to the metal, such as the UAE, Saudi, India, and other parts of the East Asian continent.  This of course is partly explained by the wide dispersal of the Chinese populace along with the low income per head in the agrarian population.  The Council asserts that the is no slowdown in China’s appetite for gold and the implication is that as disposable income increases, so will the level of gold offtake.

As far as investment is concerned, the Chinese market entered a new phase in the wake of the deregulation in 2001 and the opening of the Shanghai Gold Exchange in 2002.  A number of factors point towards increased investment demand in the country, including an average real GDP growth rate of 9.8% per annum throughout the last decade, along with the fact that regulations and barriers to international capital movements have meant that, while the country has been opening up to foreign markets and investment, it has lagged behind the western world.

A high savings ratio, plus a lack of alternative investment vehicles, points to a growing interest among the Chinese in commodity investment.  The Council identifies Chinese consumers as high savers, stemming from the accumulation of wealth that was stimulated in 1978 when the Chinese government shifted the burden of retirement income to individual households and this savings propensity was further boosted by the Asian currency crisis (late 1980s).  Net retail investment in gold in China in 2009 was 81 tonnes, up 22% year-on-year, and based on the defined “net retail investment” in the WGC quarterly “Gold Demand Trends”, China thus accounted for 43% of the world total in that category last year.  Coins and bar hoarding have been growing strongly in recent years, but it is believed that the amount of gold currently in private hands is much lower than that in countries such as India and Vietnam.  The domestic market is by no means mature and the implication is that Chinese investors are much less likely to sell into strength than some of their counterparts elsewhere.

Compounding the fact that the market is still maturing, there is a growing number of foreign and domestic companies looking to grow their business into and out of China.  This is being expedited by, for example, the fact that registration rules are being simplified for foreign investors to enter into joint ventures for the development of foreign private equity firms in China.  Carlyle Group and Fosun Group have recently received their licence to launch a US$100mn, renminbi-denominated, PE fund, while  Shanghai is also to launch an international board in 2010. Meanwhile China Investment Corporation is moving into commodities and real estate and recent filings with the SEC show that the CIC took a 1.45 mn share stake in the SPDR® Gold Shares Fund in New York (equivalent to 4.5 tonnes) in the fourth quarter of last year.

It is therefore not only the private individuals that are expanding their interests in gold, but this is spreading up to professional investors also.  WGC asserts that domestic private demand could double over the nest en years, but the private individuals are not the only source of Chinese investment in gold.

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