Why Is China Turning To Gold?

A lot of coverage has been given to the recent reporting that "China imported 209.7

tons of gold in the first 10 months of the year, a fivefold increase compared with the same period last year", with most not explaining why but just using it as bullish justification for gold.

One explanation of the increase comes from Patrick Chovanec, a professor at Tsinghua University's School of Economics and Management in Beijing. In May 2010 he "noted a strong surge in gold-buying by Chinese investors. It is attributed, in part, to the Chinese government's crackdown on the property market: uncertain whether real estate would continue to serve as a reliable store of value, like gold, the Chinese were turning to gold itself as an alternative. Subsequently, it's been observed how the vast amounts of new stimulus money injected into the Chinese economy have been channeled, initially at least, into tangible assets rather than consumption, fueling skyrocketing prices for real estate, jade, fine art, fine wine, rare tea, etc".

He says that "over the past two years, China's money supply expanded by over 50%, due to a massive lending boom that helped generate record GDP growth. That meant a lot of money shloshing around the Chinese economy, looking for somewhere to go". Because he sees that money creation as unsustainable due to pressure on the Chinese central bank to rein in inflation, he is cautious on gold: "A bet on gold, therefore, may be seen as a bet on continued Chinese liquidity". Simon Black, on the other hand, says that "when push comes to shove for now, though, China's leaders will choose inflation over stagnated economic growth."

If the Chinese central bank does seriously target inflation, this observation by Professor Chovanec actually makes a case for gold:

"Unless they already possess offshore funds, Chinese citizens have limited investment choices: they can gamble on an unstable domestic stock market, buy low-yielding government bonds, or stash their cash in even lower-yielding bank deposits. By contrast, real estateoccupied or notoffers them a visibly reassuring place to park their money, sheltered from inflation... For them, an empty condo is a store of value, much like gold, another asset that performs no practical function besides retaining its worth."

With limited investment choices, and real estate and other inflation driven speculation targeted, it leaves the traditional store of wealth, gold, as an attractive option for Chinese.

by: Revington Charollete

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