by Gordon G. Chang
Forbes

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 OctoberÂ’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 ChinaÂ’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 PeopleÂ’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 worldÂ’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. ChinaÂ’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
ChinaÂ’s central bank, there is not much demand from the countryÂ’s
institutional investors for gold. There are industrial users, of
course, but their demand is filled from domestic production – China
is the worldÂ’s largest gold producer. Most of ChinaÂ’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 ChinaÂ’s
record gold purchases from Hong Kong.

Read
the rest of the article

February
1, 2012

Copyright
© 2012 Forbes