By Jin Ge
China’s gold import from Hong Kong hit new high in October, according to FT’s Leslie Hook, and it accounts for more than a quarter of global demand, but gold price fell from above $1700/ounce to below $1600/ounce from October to today. Shouldn’t the “Chinese demand” push up gold price? Hook writes, “Some traders believe Chinese import could hit 500 tonnes this year”, that means it will be twice as much as the 245 tonnes import in 2010, and 10 times higher than the 45 tonnes import in 2009. China already overtook South Africa to become the largest gold producer in 2007, in 2010 China produced 340 tonnes of gold. Many companies that had nothing to do with mining dabbled into gold mining industry. Meanwhile, many Chinese people are rushing to buy gold as a hedge against rising inflation. Even the Chinese government is allowing more banks to import gold from abroad and design more gold-linked investment products. Gold, and property in China, are the only two assets that saw their prices doubled since 2009. But we might be witnessing the peak of China’s gold rush: there are more and more signs of a liquidity crunch in China, and more importantly, the perception of gold as a safe haven is fundamentally shaken by the volatility of gold price in the past several months.
“Gold shines in turbulent times”, these are words of wisdom passed down from generation to generation in China. My grandma repeatedly told me about her painful memory of the constant wars and frequent regime changes in the first half of 20th century, and she emphasized that paper money lost value every minute and gold was the only store of wealth people could trust. Later I found that most gold investors around me heard the same “grandma’s story”. These days, fear of inflation is again quite strong among Chinese public, and justifiable so, we have negative real interest rate for over 13 months now since 2010. But inflation rate has been descending since this July:
The mechanisms that generate most of the excessive liquidity in China, from the “infrastructure investment-land monetization-real estate” loop to the “export-foreign reserve-RMB issuing” loop, are slowing down notably. I will elaborate on the two loops in later posts, here I just want to point out the immediate liquidity crunch happening right now: most of the fixed asset investment that accounts for over 40% of China’s GDP cannot generate cash flow that exceeds loan interest; the transaction volume of property market is 50% lower than last year in most cities; the chains of underground lending are breaking with daily rumors of borrowers’ disappearance; the Shanghai stock market fell more than 20% this year and destructed massive wealth, and there are more and more news of migrant workers not getting the pay their bosses owe them!
I’m not saying that inflation is no longer a problem, negative real interest rate will probably be with us for long time, but the high price of gold today already priced in a hyperinflation scenario which is not likely to happen. I forgot to mention another well-known “grandma’s story”: the hyperinflation in the late 1940s turned the people against the Kuomingtang Regime which resulted in the victory of the CCP. The CCP therefore has been very alert about avoiding hyperinflation, it has been using negative real interest rate to subsidize state owned enterprises, but when public discontent over inflation reaches a certain level, it usually chooses to sacrifice growth for inflation control, we’ve seen evidence of that in 1993 to 1994, in 2003 to 2004, in 2006 to 2008, as well as in 2010 to 2011. Hyperinflation is such a threat to the CCP’s legitimacy that it will not risk it.
After talking about the politics about gold, let’s look at the spiritual value of gold. Because of its ability to withstand the erosion of time, gold is always a symbol of stability, safety and even divinity in Chinese traditional culture. In the past 10 years, there is only thing that can rival gold’s spectacular run-up, that is real estate. Real estate and gold share the same spiritual meaning of precious stability in a world of uncertainty. After the financial crisis in 2008, the stock market in China remained bearish, but real estate and gold continued to hit new records. But today we are seeing increasing skepticism about both of them. I wrote about people who want to return the apartments they bought in the Occupy Property Office Movement. The recent volatility of gold price has made gold investors think twice before putting more money into gold. Gold price is falling in lockstep with the Shanghai stock market, in the global market it is also traveling with risk assets. For people whose money is trapped in stocks, property and underground lending, the importance of cash flow is getting more appreciation.
The demand for gold as a safe haven in China has probably peaked but it may remain high, as collective memory of turbulence in the past decades will not fade easily and we are facing plenty of uncertainty in another period of dramatic social reconfiguration. But that social reconfiguration must involve encouraging models of wealth accumulation less dependent on speculating on and stockpiling hard assets from property, copper to gold; and transformation towards a more open, flexible and innovative society that can better adapt to whatever uncertainty there will be.
For people who are more interested in technical analysis, here is a legendary Chinese analyst’s microblog, which is predicting an up trend for gold’s ultimate rival: Dollar.
For people who are interested in the “cultural economy” of gold, I recommend my favorite book on Gold: Peter Bernstein, Power of Gold: The History of an Obsession