What China’s reopening could mean for the gold market

CHINA has long been one of the major buyers of physical gold. Since overtaking India as the world’s largest gold consumer in 2013, China contributed an average of 31 per cent to global annual jewellery demand and 24 per cent to global annual bar and coin demand, between 2013 and 2019.

However, as the Chinese economy felt the impact of its zero-Covid policy and strict Covid lockdowns, the country’s contribution to jewellery and bar and coin demand fell to 29 per cent and 21 per cent, respectively. China abruptly ended its zero-Covid policy in early December 2022 and began reopening its economy. What could this mean for the gold market? And has this reopening provided an uplift in Chinese gold demand?

While it has been only just over four months since China scrapped its zero-Covid policy, the latest gold trends in the country appear encouraging. To assess the strength of Chinese gold demand, examine physical gold withdrawals from the Shanghai Gold Exchange (SGE)‘s vaults. Withdrawals from SGE vaults are a key measure for gauging Chinese wholesale gold demand, since withdrawals can only be initiated by members of the exchange – which include large buyers of physical gold such as financial institutions, gold dealers and jewellery manufacturers.

Based on the latest available data, SGE members withdrew 157 tonnes of gold in March 2023, continuing February’s strong demand. This was the largest monthly withdrawal since September, and provides some early evidence that China’s reopening has created an uplift in Chinese gold demand.

Since reopening, China has also resumed reporting its gold purchases at the central bank level. The People’s Bank of China (PBOC) reported an increase of 32 tonnes in November 2022, the first noticeable increase since September 2019. PBOC reported additional consecutive purchases of 30 tonnes, 15 tonnes, 25 tonnes and 18 tonnes between December 2022 and March 2023. That brings total purchases between November 2022 and March 2023 to 120 tonnes, boosting its gold reserves from 1,948 tonnes to 2,068 tonnes. This represents a 6.2 per cent increase in just over five months. To put this into context, China purchased 93 tonnes of gold in total in 2019, before the Chinese government stopped reporting its gold purchases in the fourth quarter of 2019.

We believe the surge in geopolitical tensions is one of the key reasons why China has recently become more aggressive with its gold purchases. Adding gold to their reserves should increase international stability and creditability for the domestic economy and local currency, for the potential use of their Cross-Border Interbank Payment System (CIPS) to settle international trades.

According to the World Gold Council’s 2022 central bank gold reserves survey, economic concerns such as inflation and geopolitical instability may have contributed to the growing demand from emerging market and developing economies, and are now the major reasons behind the reserve management decisions of the central bank respondents.

At the recently held National People’s Congress in March, China announced plans for a consumer-led revival of the Chinese economy and set an annual growth target of 5 per cent for 2023. This was after 2022 growth came in at 3 per cent – one of the slowest rates since the mid-1970s. The Chinese government’s main priority will be to boost consumer spending by increasing household incomes – which include a target to create 12 million more urban jobs. The International Monetary Fund predicts China’s economy is likely to rebound to 5.2 per cent growth in 2023, with household spending and manufacturing business activities expected to recover emerging out of the country’s zero-Covid stance.

The post-Covid government policy to support a consumer-led economy should continue to position China as one of the world’s most important markets for gold consumption. We anticipate that Chinese citizens may gravitate towards gold in the near term to build and protect wealth – driven by a deteriorating economy – and to hedge against the relatively poor performance of the Chinese stock markets since 2020. The markets have been negatively impacted by the lockdowns as well as Beijing’s actions to crack down on certain sectors.

The writer is Asia-Pacific gold strategist, SPDR ETFs, at State Street Global Advisors.