China central bank in gold-buying push

Many believe that China made significant gold purchases in the final months of 2011. According to reports, there is a discrepancy between China's imports and the World Gold Council's estimates of consumer demand, which leads them to believe that China's central bank is buying gold.

By Jack Farchy in London
February 16, 2012 8:37 pm
Financial Times

The World Gold Council believes China’s central bank made significant gold purchases in the final months of 2011, contributing to a surge in the country’s imports.

Marcus Grubb, managing director for investment at the WGC, a lobby group for the gold mining industry, told the Financial Times that buying by the People’s Bank of China could explain a large discrepancy between Chinese imports and the WGC’s estimates of consumer demand in the country.

“There is absolutely a discrepancy in the import figures,” said Marcus Grubb. “The obvious inference is that the central bank is buying.”

His comments mark the first public statement from a senior gold industry executive pointing to purchases by the Chinese central bank, a trend that many others have highlighted privately. The PBOC did not respond to questions on Thursday.

China’s imports from Hong Kong, which account for the majority of its overseas buying, soared to 227 tonnes in the last three months of 2011, according to data published by Hong Kong. Mine production in the country, the largest gold producer, stood at about 100 tonnes in the quarter, implying total supply of at least 330 tonnes.

That compares to demand of 191 tonnes for gold jewellery, bars and coins – which account for the vast majority of Chinese demand – reported by the WGC on Thursday.

Most industry executives believe China has been quietly accumulating gold produced in its domestic market for years, but it rarely publishes details of its holdings. In 2009, Beijing revealed it had almost doubled its gold reserves since 2003, making it the fifth-largest holder of bullion with 1,054 tonnes.

Philip Klapwijk, head of metals analytics at Thomson Reuters GFMS, the consultancy that produced the data underlying the WGC report, agreed that the so-called “official sector” of the central bank and other sovereign institutions may have bought gold in the final quarter of the year. “It could be that the apparent surplus in the domestic market due to the scale of imports reflects official sector purchases,” he said.

However, he added that some of the apparent surplus could be accounted for by stockbuilding by Chinese banks ahead of the lunar new year holiday.

Mr Grubb added that the Hong Kong trade data could yet be subject to revisions, or that other players, such as Chinese sovereign wealth funds or other financial institutions, could have accumulated stocks of gold during the quarter.

But he added: “In the medium term we do know the Chinese central bank and other Asian central banks with large foreign exchange reserves have been increasing their holdings of gold. This is consistent with that.”

Central banks bought about 440 tonnes of gold last year on a net basis, the WGC said, the highest level of buying since 1964. Large buyers included Mexico, Russia and South Korea.

China’s State Administration of Foreign Exchange, which manages China’s $3.2tn in foreign reserves under the Central Bank, has said publicly that it views gold and other commodities as having limited relevance for its investments because of price fluctuations, storage costs and limited transaction volumes.

However, advisers to the central bank have been urging China to diversify its holding of foreign reserves, which is held mostly in US Treasuries and other governments’ bonds.

Demand from Chinese consumers is also rising rapidly, as they pour new-found wealth into gold. The WGC on Thursday predicted that China would this year overtake India as the world’s top gold consumer for the first time.

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