China Loves Gold

A recent article in the Financial Times highlighted some of the trends currently occurring in China. I excerpt the following from that article:

China loves gold in all its forms: as a reserve currency, jewellery, an investment – even gold that is not real at all, or “virtual gold”, the internet commodity used as currency in online games such as World of Warcraft. The Chinese government is trying to crack down on trade in virtual gold, which is “farmed” by online gamers in China and sold to online gamers in the first world.

But when it comes to the real stuff – gold jewellery and gold bullion, for either adornment or investment – trade in China has risen sharply. Beijing recently revealed that it had been secretly buying gold for years in order to diversify its foreign reserves, and had almost doubled its bullion holdings. But they are not the only ones: the rising tide of wealth among middle-class Chinese has made China the second-largest gold jewellery market in the world since 2007, behind only India. Sales of gold and silver jewellery in China rose by an astounding 28.7 per cent in May year on year – proof, if any more were needed, that Chinese consumers have certainly not stopped spending money during the financial crisis. Total gold demand in China last year was nearly 400 tonnes, up by 21 per cent from 2007.

But Chinese people like their gold purer than their western counterparts: 24 carat, rather than 18 carat. The reasons for that, says Shi Heqing, gold analyst at Beijing Antaike Information, are partly historical: “Chinese people have gone through several wars in the last century, and the memory of those is still fresh, so they like secure ways of keeping their money. In the west, people seem to use gold more for decoration or beautification.”

The recent rollercoaster ride in the mainland stock market – which at one point last year had fallen by 70 per cent from its 2007 height, but has since crawled back to half the peak level – has also prompted more investment interest in gold in bullion form, gold market analysts say.

Mr Yu, a 55-year-old antiques trader in Shanghai who declined to give his first name, says he bought 500g of gold in 2007 and increased his holding to 2,000g at the end of last year. “I know people who are still buying stocks at this moment … but gold may be better for people my age who are more risk-averse.”

Or as Shaun Rein, managing director of China Market Research in Shanghai, puts it: “In China, the banking system has only recently become stable. Chinese people like gold: you can always melt it down and it’s easy to carry.”