China re-opens the gold door

“May you live in interesting times” runs the old curse, often (erroneously) attributed to a Chinese source. The nearest Chinese expression is believed to be 寧為太平犬,不做亂世人, which translates to “better to be a dog in times of tranquility than a human in times of chaos”. Times are certainly interesting today, not least in China.

Reuters has reported that China “has given domestic and international banks permission to import large amounts of gold into the country”, according to “five sources”. The country’s central bank, the People’s Bank of China (PBoC), controls the amount of gold that can be imported, and has apparently given the green light to these imports, which could total 150 tonnes (worth around $8.5 billion at current prices) and be shipped either this month or next. If this turns out to be true such a big gold import should certainly underpin the gold price, which has been climbing off its recent low and is nudging $1,800 an ounce. Since February 2020, China has imported about 10 tonnes per month; in 2019, it imported about 75 tonnes a month. Importing 150 tonnes over April/May would therefore signify a return to pre-pandemic days.

A source at one of the commercial banks which has been granted permission to import gold told Reuters: “We had no quotas for a while. Now we are getting them… the most since 2019”. I hope they manage to preserve their anonymity — talking to journalists unofficially about China’s gold is a serious no-no.

China is today the biggest miner of gold, producing 380 tonnes in 2020 according to the US Geological Survey. The Chinese state exercises tight control over gold (and silver) and pursues “a policy of unified control, monopoly purchase and distribution of gold and silver”, tightly supervising private individual trading and exports. As of late last year, all China’s commercial banks — including state-owned ones — suspended the opening of new precious metal accounts, under the guise of protecting gold holders from ‘volatility’. Together with India, China accounts for around 40% of annual gold demand. In February, India reduced gold import duties by an effective 1.25% which was seen as an effort to reduce gold smuggling. In March this year, India’s gold imports rose 471% year-on-year to 160 tonnes.

Back to normal or something else?

There are at least two possible views of this re-opening of the door to gold imports.

The first and most likely is that China’s relationship with gold is merely returning to the status quo ante bellum. Chinese citizens like gold, both to wear as jewellery and as a means to tuck away their savings. China’s appetite for gold has led it to explore overseas’ mining ventures, not always successfully — the Canadian government last December blocked on grounds of “national security” the state-owned Shandong Gold Mining Company from taking over and developing a gold mine in the remote Nunavat region. And while China officially acknowledges it holds almost 2,000 tonnes in official reserves — the precise figure is a closely-guarded state secret — the actual figure is believed to be more be 14,500 tonnes, or 1.8 times bigger than US reserves.

But there is another possibility, which ties in with China’s launch of its own Central Bank Digital Currency or CBDC, which eventually will eradicate cash from Chinese society and enable tighter social surveillance.

This state-controlled digitalisation of the Renminbi could also, some are arguing, hasten the decline of the US dollar’s dominance as the global reserve currency and insert the Renminbi instead. The Renminbi was already awarded the status of a reserve currency by the International Monetary Fund (IMF) in 2015.

More than 60% of the world’s currency reserves are dollar-denominated, as they have been for at least the past 20 years. But they fell last year; meanwhile allocations to the Renminbi have risen; that currency is now the fifth most-used for global payments, rising from 35th place in 2010.

China’s President Xi Jinping has grand ambitions and is in a hurry to stamp his place in history. The country’s remarkable 18.3% rate of growth in the first quarter of 2021 over the same period in 2020 has clearly strengthened his hand. He said this week at the Boao Forum for Asia that “bossing others around and interfering in other countries’ internal affairs will not be well received”, which was widely seen as a criticism of the US.

But strong words will not alone be enough to persuade investors and trade to ditch the Dollar in favour of the Renminbi. Greater security regarding foreign investment in China — currently being tested in a Chinese court over the default by Peking University Founder Group (PUFG) of some $7 billion of bonds — is under scrutiny. Foreign bondholders have collectively taken on some $82 billion of China-issued debt backed by nothing more than “keepwell deeds”, a credit protection tool commonly used by Chinese companies issuing debt offshore. These deeds are used in offshore finance transactions, particularly those that use bonds relating to Chinese transactions. Keepwell deeds are used in around 16%, or $96 billion, of outstanding Chinese offshore bonds. The legal enforceability of such deeds is opaque.

Gold behind China’s CBDC?

If the digital Renminbi or CBDC is to truly present a challenge to the US Dollar as the world’s global reserve currency then it will have to overcome deep political and economic scepticism from Western investors as to China’s reliability as a partner. The momentum is moving in that direction, but erratically; the state clearly exerts the kind of interference in corporate life (such as last year’s block against the IPO of the massive Chinese company Ant Group) that private investors find discouraging. If all that ‘backs’ the digital Renminbi or CBDC is the word of the Chinese government, then it is unlikely to ever succeed in knocking the US Dollar off its perch.

But if something universally respected, trusted, and valued — such as gold — was declared by China to back its CBDC — that would be a very different prospect. Stranger things have happened. The implications would be deeply disruptive of the world’s financial system and would anger many policymakers in the West — but President Xi has proved time and again his indifference to such matters.