“Gold going in is money going out”, an industry source in Asia told Reuters, for an interesting little exclusive out Wednesday afternoon.
Reuters cites more than half a dozen unnamed industry insiders in the course of documenting Beijing’s efforts to “severely restrict” gold imports amid mounting uncertainty since May, when Donald Trump shattered months of calm on the trade front by abruptly breaking the Buenos Aires truce with a May 5 tweet announcing a tariff hike.
The world’s largest importer of gold has curtailed shipments by between 300-500 tonnes versus last year, and customs figures betray a rapid deceleration in imports. Here’s Reuters:
The bulk of China’s imports – from places such as Switzerland, Australia and South Africa – are conducted by a group of local and international banks given monthly import quotas by the Chinese central bank.
But quotas have been curtailed or not granted at all for several months, seven sources in the bullion industry in London, Hong Kong, Singapore and China said.
The implication is obviously that Beijing is clamping down on gold imports in order to keep money from fleeing China amid the worsening trade war. One assumes the gold buying is conducted in dollars.
Although the sources reminded Reuters that Beijing restricting imports of the precious metal isn’t unprecedented (they did it in 2016 too), the scale is. Banks imported “next to nothing” over the last two months, apparently.
Reuters points to net errors and omissions in the BoP data on the way to suggesting that capital outflows have accelerated in 2019. The NEO line item is -88 billion for Q1 of this year.
After the 2015 devaluation, authorities cracked down on residents’ ability to buy overseas assets through informal channels. NEO in some cases proxies for illicit outflows which tend to pick up when the yuan falls.
On Monday, Goldman was out with an expansive take checking in on capital outflow pressures amid the currency’s push beyond the psychologically important 7 handle.
“In 2H 2015 to 2016, after the unexpected RMB depreciation and dampened sentiment towards Chinese growth and the currency, NEO became more negative [and] as a share of total trade, it declined to almost -6% of total trade flows, vs -1.2% in 2014 on average”, the bank said. Thanks to capital controls, NEO as a share of total goods trade became less negative starting in 2017.
Goldman goes on to note that “in 2H 2018, despite a weaker currency, NEO as a share of total trade flow averaged around -3.8%, still a lot higher than the -6% recorded from 2H 2015-2016”.
(Goldman)
But as you can see over there on the right-hand side, it looks to be trending more negative again, which could suggest that outflows have begun to pick up. It should be noted that Goldman’s work on quantifying Chinese capital outflows is not amenable to concise treatment. The piece from which the above quotes are excerpted is 16 pages long, and it’s just one of dozens upon dozens the bank has penned since 2015 on the subject.
In any case, Reuters cites its industry sources as explaining that “restricting gold imports is an easy way to curtail outflows without affecting people’s lives”.
The article also observes that recent price gains in gold have tempted Chinese to sell their holdings at a profit, which has, in turn, driven up local supply “while resurgent demand elsewhere in the world has been strong enough to soak up extra metal”
Meanwhile, the PBoC has been building its gold reserves in an apparent bid to gradually diversify dollar holdings. That effort is mirrored by other global central banks. China’s stash of bullion rose for a seventh month in July to 62.26 million ounces from 61.94 million the previous month.
Hence gold’s somewhat muted action today., I suppose.