Why Are the Chinese Buying Record Quantities of Gold?

Letter to Editor

Saturday, 04 February 2012 00:19

By: Gordon G. Chang

This month, the Hong Kong Census and Statistics Department reported that China imported 102,779 kilograms of gold from Hong Kong in November, an increase from October’s 86,299 kilograms.  Beijing does not release gold trade figures, so for this and other reasons the Hong Kong numbers are considered the best indication of China’s gold imports.

Analysts believe China bought as much as 490 tons of gold in 2011, double the estimated 245 tons in 2010.  “The thing that’s caught people’s minds is the massive increase in Chinese buying,” remarked Ross Norman of Sharps Pixley, a London gold brokerage, this month.

So who in China is buying all this gold?

The People’s Bank of China, the central bank, has been hinting that it is purchasing.  “No asset is safe now,” said the PBOC’s Zhang Jianhua at the end of last month.  “The only choice to hedge risks is to hold hard currency—gold.”  He also said it was smart strategy to buy on market dips.  Analysts naturally jumped on his comment as proof that China, the world’s fifth-largest holder of the metal, is in the market for more.

There are a few problems with this conclusion.  First, the Chinese government rarely benefits others—and hurts itself—by telegraphing its short-term investment strategies.

Second, the central bank has less purchasing power these days.  China’s foreign reserves declined in Q4 2011, falling $20.6 billion from Q3.  The first quarterly outflow since 1998 was not large, but the trend was troubling.  The reserves declined a stunning $92.7 billion in November and December.

Third, the purchase of gold would be especially risky for the central bank, which is already insolvent from a balance sheet point of view.  The PBOC needs income-producing assets in order to meet its obligations on the debt incurred to buy foreign exchange, so the holding of gold only complicates its funding operations.  This is not to say the bank never buys gold—it obviously does—but there are real constraints on its ability to purchase assets that do not provide current income.

Apart from China’s central bank, there is not much demand from the country’s institutional investors for gold.  There are industrial users, of course, but their demand is filled from domestic production—China is the world’s largest gold producer.  Most of China’s gold demand from foreign sources, therefore, is from individuals.

So why are individuals now buying gold?  The easy answer is that the demand is only seasonal, as Jeff Wright of Global Hunter Securities believes.  The Chinese traditionally buy gold presents in the run-up to the Lunar New Year, which started a week ago.  Yet gift-giving does not begin to explain the surge in gold purchases that started as far back as July.  November was the fifth-consecutive month of China’s record gold purchases from Hong Kong.

A better explanation for the gold-buying binge of Chinese citizens is that they are using the shiny commodity as an inflation hedge, as the Financial Times recently suggested.  Yet the buying of gold has increased while inflation has eased.  And that means there must be another explanation.  The best explanation is that individuals in China are using gold as a substitute for capital flight.

Although indicators showed the Chinese economy faltered only at the end of September, there had been a growing sense of pessimism inside the country for months before then.  Beijing, after all, could build only so many “ghost cities” before citizens began to notice.  As Joseph Sternberg of the Wall Street Journal Asia said on the John Batchelor Show last Wednesday, “people inside China seem to be losing faith in the Chinese growth story that we’ve been hearing so much about for the past few years.”  Estimates of capital flight are sketchy, but it appears there was $34 billion of it in the third quarter of last year and a $100 billion in the fourth.

Not every Chinese citizen is in the position to export cash, so the next best tactic for the nervous is to buy gold, a refuge from plunging property prices and declining stock markets as well as an anticipated depreciation of their currency.  “Within China,” notes Michael Pettis of Peking University, “many are going to argue that the rapid decline in the trade surplus, coupled with unmistakable evidence of flight capital, means that the PBOC should devalue the RMB.”  And the fact that China’s leaders in public are talking about the adverse impact of the European crisis on China weighs heavily on sentiment.

The worst thing about capital flight and gold purchases is that they drain liquidity out of the Chinese economy just when it is needed most.  Beijing can continue to work its magic as long as strict capital controls keep money inside the country.  Once they fail to do so, however, all bets are off.  The purchasing of gold, of course, results in the exporting of cash.

Chinese asset values have not yet crashed across the board, but the buying of gold—a leading indicator of panic—is an especially troubling sign that they will.  Therefore, it is not surprising that gold purchases by Chinese citizens and investors are frightening Beijing’s technocrats.  At the end of last month, they shut all of the countries gold exchanges other than two of them in Shanghai.

Follow Gordon on Twitter @GordonGChang

Conclusion of the memogate conspiracy

Editorials

Last Updated on Saturday, 28 January 2012 05:12 Saturday, 28 January 2012 04:54

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By Tariq M. Siddiqui and Ali S.J. Khan

ISLAMABAD - Memogate scandal has been perhaps the most violent and maddening scenes of late 2011 and early 2012. But at its conclusion, we wait for an even more interesting turn of events yet to be seen; the quite climax.

The spectacular display of balancing factor in Pakistan, the army has defended the country from foreign invaders and terrorists to the best of its abilities and has proven to be the most well organized and coordinated institution of Pakistan. But when the lid was blown off the memogate conspiracy against the army in the memo written to Adm. Mike Mullen of the United States Armed Forces, the army summoned its power after a long time to get resignation of Hussain Haqqani and to close the chapter. Nawaz Sharif sensing political mileage, four days before lapse of his self announced seven day deadline, had the matter in the courts hoping for early elections.

However, the Peoples Party led government of Pakistan had yet another card to play: a closing deal with the army to put the memo case behind and make it seem like a thing of the past. The army accepted the closed doors proposition, but the effects of this scandal may work in favor of the country as the government has made preparations to quit with a graceful exit as early as late August or early September of 2012.

PML-N also played its role brilliantly as a third party petitioner to have this scandal investigated but at the suggestions of some power circles has kept its desires out of the way of any further proceedings in the matter.

The court realizing the deal has also decided not to pursue the case seriously. But, instead, out of the blue opened a decade old Mehran Bank Case with similar plaintiffs and defendants not necessarily in the same order. However, if any substantial evidence is provided by Mr. Mansoor Ejaz in the court, then that could mean a violent end to a five year long despotic regime. The main issue has now turned into a political one as the PPP and other parties in power in Pakistan feel that their vote bank is being emptied at the whim of a blossoming politician and chair of the Pakistan Tehreek e Insaaf (PTI) Imran Khan. The government sensing its troubles decided to not to wait too long for elections and tried to have them as early as possible as to not to hurt their vote bank, but it may be too late, as most of the people in Pakistan who are from other vote banks now see PTI as their personal favorite.

Writers are members of core team at Pak1stan first group.

Email: Tariq Siddiqui - This e-mail address is being protected from spambots. You need JavaScript enabled to view it , Ali Khan - This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Did This Pakistani General Teach Politicians A Lesson In Obeying The Law?

Letter to Editor

Tuesday, 17 January 2012 07:56

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LAHORE, Pakistan—General Kayani, the army chief, has given the country’s politicians a lesson in tactics. While politicians often opt for knee-jerk responses to serious matters or follow their staffers’ improvisations, the general has chosen to play by the book.

He was prompt in answering the Supreme Court’s notice and thus distanced himself, in this case at least, from the politicians who are getting flak for avoiding compliance with the judiciary’s directives. He sent his statement to the Defense Ministry, as per rules. If the ministry did not follow the procedure laid down in the Rules of Business inscribed in a moth-eaten file of 1973, he cannot be blamed. That makes the PM angry at a time when he needs to be cooler than cucumber.

This display of tactics is the result of more than six decades of training in the art of autonomous management of an organization that – unlike Pakistani politicians – never stops widening its knowledge base and regularly puts its theoretical formulations to practical test. It is also the result of governments’ age-old policies of allowing the military great freedom of operation and autonomy not only in its own sphere but also beyond it.

Among the many matters civil society organizations dabble in, without unfortunately pursuing their efforts with due diligence, the question of imbalance in civil and military relations figures prominently. While it may be possible to blame the generals for assuming responsibilities that lie outside their professional mandate, the politicians have to accept a greater blame for the straits they have landed themselves in. They have yet to realize that the imbalance they complain of cannot be corrected by tinkering with this office or that and that the process is going to be long and arduous.

Two things are necessary. First, it needs to be understood that nobody can trifle with the military and its task of defending the country against external aggression. The people must be proud of their sons who give their lives to secure their freedom from external threats. But no good military gets involved with politics, even with civil administration (Ayub Khan too called it the route to corruption) because that will undermine the interests of the state and the military both.

Anyone who goads the military into intervening in politics is not its friend.

Secondly, the way to the establishment of the people’s sovereignty lies in breaking the colonial model to which the state is shackled. The state of Pakistan needs to be re-structured in accordance with modern democratic models. Only then will its organs, and institutions subservient to them, will be able to find their legitimate places.

Until these two conditions are met the politicians will continue to be outmaneuvered by men in khaki.

Mr. Rehman is Secretary General of the independent Pakistan Human Rights Commission [PHRC]. This is an excerpt from his longer article published in The News on Sunday.

Hateful Indians At It, Again

Letter to Editor

Tuesday, 17 January 2012 01:28

'Who gets to decide when a democratically elected government's time is up? To the average Japanese, Indian or American, the answer is obvious: the same people who voted it into office in the first place. Not so for the average Pakistani.'