China’s gold market not immune to a wider downturn

As the Chinese economy continues to be disrupted by the outbreak of the novel coronavirus and parts of China’s economy come to a virtual standstill, it would be unrealistic to expect that the Chinese gold market, the world’s largest, will not be adversely impacted.

From quarantined cities to lower consumer demand, from reduced flight traffic to closed frontiers and boarders, the economic shock to diverse sectors of the economy, including the domestic gold market, should not be underestimated.

The World´s Largest Gold Market

As a reminder, China is the world’s largest importer of gold, the world’s largest gold mining producer, and the country hosts the world’s largest physical gold bourse in the form of the Shanghai Gold Exchange (SGE), an exchange based in Shanghai but which has hundreds of domestic member companies across the country as well as a nationwide network of more than 65 certified vaults across 36 Chinese cities. Add to this a whole range of refineries and Chinese banks that are also heavily involved in the domestic gold market and a Chinese population known for its voracious appetite for investment gold bars, coins and jewelry, and you can see that there are a lot of moving parts that could go wrong amid a slowdown.

Although gold is a safe haven asset whose price performs well in times of crisis, the slowdown referred to here is in terms of the infrastructure of the market and its smooth and normal functioning. From a purely logical perspective, quarantined cities that resemble ghost towns will not be conducive for employees to return to work, and consumers are not consumers if they cannot leave their houses.

Industrial demand for gold in China could also be effected by a slowing economy. On the supply side, air freight into China is now being affected with less cargo plane traffic and a more of less absence of passenger flights which often carry ‘belly cargo’

This could obviously could have an impact on gold import volumes. Likewise, China’s port, the the gateways for imported gold bearing mineral material which contributes to China’s gold mining output, are now too being adversely affected.

Staff at their desks in the Shanghai Gold Exchange, early February. Source: SGE 

However, as with any rapidly changing situation, it’s still too early to assess what the exact adverse impacts on the Chinese gold market will be, in the same way that no one can quantify at this point what the impact of the virus will be on China’s economic growth, or China’s supply chains, or China’s consumer behavior.

Will the coronavirus turn out to be a Q1 2020 phenomenon, or linger on into Q2 or the second half of the year? At this point in time, no one knows, so we will just have to wait and see. The same goes for the data coming out of China’s gold market, metrics such as gold imports, gold mining production, wholesale gold demand (Shanghai Gold Exchange gold withdrawals), and consumer gold demand. The market will just have to digest this data for January, February and March as it gradually becomes available. That is of course if Chinese data becomes available on a timely basis and is not, for various reasons (face saving or otherwise) delayed. This is not just an academic concern, as data delays have already started, with for example, China just having announced that the release of January 2020 trade data  was being delayed from its previously scheduled date of 7 February,  and will now be bundled in with February trade data, to be released at some point in March.

#China‘s customs office said that it would not release preliminary trade data for Jan but would combine Jan and Feb data.

Jan data had been expected to be released Friday morning. February 7, 2020

— YUAN TALKS (@YuanTalks)

But in a nation famous for saving face and obsessed with the stability and control of its society, these data delays might be compounded and roll on for months, before the Chinese authorities deem it safe to again release data that is free of any sign of economic weakness. The data will also need to take into account that the extended Chinese New Year period, which this year ran on for 10 later more, and is only coming to an end now.

So while we can’t examine much from the Chinese gold market about what’s happening right now, except anecdotally, we can review Chinese gold market activity up to the end of 2019, i.e. just before news of the coronavirus outbreak began to take hold. This will be a benchmark for comparative data when it eventually starts coming in and later on for the full year 2020.

Chinese Gold Mining – The World´s Number One

The China Gold Association (CGA), the representative organisation of Chinese gold mining companies and refiners and which promotes the Chinese gold market, recently announced that during 2019, domestic Chinese gold mining output totalled 380.23 tonnes. While this was a 5.2% reduction compared to 2018, China still remained at the top of the country rankings for annual gold production in 2019 for the thirteenth year running, ahead of Australia and Russia. Note that as well as a decline of domestic gold mining output to 380 tonnes in 2019, Chinese gold mining output also dropped between 2017 and 2018, falling from 429 tonnes to 404 tonnes.

In addition to domestic gold mining, China also ‘produces’ gold output from imported raw materials and in quite large volume. According to the China Gold Association, for 2019 the gold content of imported gold smelting materials into China was 120.19 tonnes, up 6.57% compared to 2018. Adding these two figures together means that last year, China in an overall sense ‘produced’ a total of 500.42 tonnes of gold, which was just 2.62% lower than in 2018. Again according to the China Gold Association, as the supply of gold from domestic mines has tightened due to factors such as tougher environmental regulations, these imported gold bearing raw materials are “becoming an important supplement to China’s gold production.

Shuttered mines, lower operating rates at mines, transport obstacles for returning mine workers, lower base metal prices including copper, all of these things are bound to have an impact on Chinese domestic gold mining levels, at least in Q1. Given the unclear outlook for a resolution of the coronavirus, it appears that Chinese gold output will continue its downtrend in 2020, and be somewhere under 380 tonnes by year end.

Gold Imports into China

In late 2018, the Chinese customs authority began publishing monthly gold import and export data on its website, while also backdating this data to the beginning of 2017, thus providing a full three years of monthly data to analyse. Note, this is non-monetary gold, i.e. gold that is not central bank gold. Central bank gold, or ‘monetary gold’ flown into the country by the People’s bank of China is exempt from trade statistics reporting.

With the December 2019 gold import data now released, we can see that China imported 988 tonnes of gold in 2019. This was a huge 34% drop on the record 1506 tonnes of gold which China imported in 2018, but also 22% lower than the 1262 tonnes of gold which China imported in 2017.

Chinese gold imports, annual figures 2017 – 2019. Source:

This much lower import total, coming in at less than 1000 tonnes, was despite a robust monthly gold import total for December 2019, when China’s gold imports surged to 146.7 tonnes. See chart below.

Monthly Chinese gold imports, January 2017 – December 2019, Source:

From the above chart you can see that monthly gold imports for the seven months between May and November 2019 were far lower than usual. For example, China imported more gold in the 4 months from January to April 2019 (448 tonnes) than it did over the 7 months from May to November (393.5 tonnes). In fact, monthly average gold imports over January to April (112 tonnes per month) were exactly twice the monthly average over the May to November period (56 tonnes per month). While the surge in December gold imports to 146.7 tonnes boosted the monthly average over the 12 months to 82.3 tonnes, it was a case of too little, too late.

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