China’s gold binge shows how freaked out its households are about the future

They’re flying off the shelves in China.
They’re flying off the shelves in China.
Image: Hong Wu/Getty Images
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China’s National Bureau of Statistics just announced that Chinese investors bought 30.3 billion yuan ($4.93 billion) worth of gold and silver jewelry sales (link in Chinese) in April, 72% more than than in April of 2012. For anyone but goldbugs, this piles on a couple more reasons to worry about the Chinese economy.

Capital outflows: a vote of “no confidence” against the Chinese economy

That surge in Chinese demand isn’t simply because gold is an inflation hedge—it’s also rooted in that fact that capital controls leave most Chinese people with few assets in which they can invest. This has created asset bubbles in everything from contemporary art to real estate. And gold has always been a fairly popular asset in which to invest—about 18% of global demand, by weight, came from mainland China in 2012, according to the World Gold Council (pdf).

But it’s weird that Chinese households would exchange yuan for gold right now. Aside from gold’s being such a risky asset, the yuan is also a pretty good bet right now. Here’s a look at the yuan-per-dollar exchange trend:

Image for article titled China’s gold binge shows how freaked out its households are about the future

Since gold prices are denominated in dollars, as the yuan appreciates—it’s risen 1.3% against the dollar since the beginning of the year—Chinese investors in gold will see their profits erode. And on top of that, gold is just plain expensive to buy in China. Purchasing physical gold costs about 10-19 yuan per gram in transaction fees (link in Chinese), reports International Finance News.

No appetite for consumption

Every yuan worth of gold purchased by Chinese households is a yuan they can’t spend on goods and services—spending that’s critical to China’s economic rebalancing. If you strip out “gold and silver jewelry” sales from the last month’s retail data, a 12.8% increase becomes a much less impressive 12.1%.

Distortions in import data

Finally, there’s some important context on how gold contributes to imports, via Chinese financial magazine Caijing (link in Chinese):

Image for article titled China’s gold binge shows how freaked out its households are about the future

In the chart above, Sprott Asset Management shows that gold imports for the year ending in March accounted for more than one-third of the increase in total value of goods imported. Stripping out gold sales the way we just did for retail sales knocks the 4.6% year-over-year increase in March imports down to 3.0%. That’s bad news for a country that should be trying to even out its current account.