48% of its massive 2016 imports went to financial institutions, according to researchers at Singapore’s Bullion Star
“[U]sing the broadest definition of gold demand, SGE gold withdrawals are a suitable proxy for overall gold demand in China. This gold demand can be labelled as “Chinese Wholesale Gold Demand” and comprises two main categories, namely, consumer gold demand and institutional gold demand. Consumer gold demand generally refers to gold jewellery fabrication demand, retail physical gold bar and coin demand, and in some cases also includes industrial fabrication demand. Institutional demand can be viewed as individual and institutional investor purchases of gold bullion directly on the SGE trading bourse, and withdrawal of this gold from the SGE vaults.”
Chart courtesy of Bullion Star
MK note: Bullion Star asserts an important finding in the Chinese gold trade question, i.e., the level of China’s huge imports, 2200 tonnes annually, taken up by Chinese institutions including some of their largest banks. Judging from the chart above that number is roughly 1050 tonnes or 48% of total imports. Further, the Australian bank Maquarie reports a massive 3000 tonnes of inventory parked on financial institution balance sheets. By contrast, China reports only 1842 tonnes in official reserves. We must keep in mind the Peoples Bank of China owns the commercial banks and by proxy the gold on their balance sheets.
I suspect that the banks’ gold inventory could be significantly higher than Maquarie’s estimate when you take into account the massive Chinese imports over the past several years. Of course, much of this gold moves down line to their customers including wealthy individuals, other financial institutions and the retail gold business.
China’s financial institutions, in effect, comprise the greatest single end point to the London-Zurich-Shanghai physical gold pipeline – strong-handed buyers with plenty of capital emanating ultimately from the country’s massive national reserves. The consistent flow of physical gold bullion – mostly in the form of 32.15 troy ounce kilo bars – is part, if not the essence, of China’s national asset diversification program as stated years ago by governor of the Peoples Bank of China, Zhou Xiaochuan:
“At present, up to 12 trillion yuan stays in domestic residents’ saving accounts. The launch of individual gold investment, therefore, will allow residents to change currency assets into gold assets. At the macro level, it will expand channels for changing savings into investment, thus adjusting the money supply; in the micro aspect, allowing citizens to trade and keep gold can improve social welfare, benefiting both the country and the population. Moreover, with the dual attributes of common commodity and currency commodity, gold is a desirable instrument for hedging. Therefore, developing gold trade for individuals is practical.” – Zhou Xiaochuan, Governor, the People’s Bank of China
One more consideration: China is now engaged in policies designed to drive the yuan down against the dollar and potentially ratchet up domestic inflation. The net effect could end up being even more demand for the metal internally and pressure on global supplies externally. Thus far this year, gold is up 9% in yuan.