The People’s Bank of China recently lifted its temporary restraints on gold imports that were placed on specific lenders in an attempt to protect the renminbi. The action caused local gold prices to rise in China, leading to the central bank lifting the imposed restraints last Thursday.
The difference between the Shanghai and London gold prices reached an astonishing $121 per ounce based on public trading prices last Thursday. By Monday, the spread dropped back down to a more relaxed $76 per ounce, following China’s movement back to more open gold import policies on state and specific commercialized banks.
Back in August, China began reducing the number of quotas it would grant for international gold imports as a way to defend the renminbi and hedge against the rising inflation rates by easing purchases. With this policy, though, in early September, the renminbi plummeted to its lowest level against the U.S. dollar in 16 years, according to recent economic data.
After this disappointing data came out, the People’s Bank of China released a warning against bets regarding renminbi depreciation. The central bank initiated numerous measures to defend the currency’s strength, including lifting foreign reserve requirements and enacting state bank purchasing. Following these actions, the renminbi quickly regained its footing, reaching around Rmb7.286 against the U.S. dollar on late Monday.
The People’s Bank of China lifted the restrictions on gold imports last Friday, and it’s clear that the resuming of gold imports allowed the renminbi to stabilize despite no official statements connecting the two events.
China’s central bank directly controls how much gold can enter the nation’s domestic market using a series of quotas provided to commercial banks. The quota system acts as an unofficial tool for controlling precious metal flows and currency market performance rates.
The gap in China’s gold market has continued widening since early July, when the premium began growing with the import curbs in place. With gold restricted, local prices, of course, skyrocketed.
“Improving gold demand and relatively tepid imports in recent months may have led to local demand and supply conditions tightening, pushing up the local gold price premium,” The World Gold Council explained in a report last week.
The import ban may appear to have pushed the renminbi down, though Chinese officials say otherwise. Regulators in China believe that the renminbi would have fallen to even weaker levels if the central bank had not imposed the gold restrictions because a U.S. dollar-buying frenzy would have caused further outflows of capital that would place stronger pressure on the renminbi, according to their forecasted calculations.
The level of the price spread displayed positive gold domestic demand in China, ultimately supporting global bullion prices. With this movement, gold rose by 0.3% on Monday to nearly $1,930 per ounce.
Despite the temporary import restrictions, China has maintained its position of being one of the top gold buyers in the world. In August, the People’s Bank of China purchased gold for the tenth month in a row. This year alone, the nation increased its gold reserves by 900 tons, reflecting its highest purchase level in the last five years, including 2022’s record-breaking central bank purchase year.
Right now, gold makes up 1.38% of China’s total foreign exchange reserves. While the nation may seem like it’s stockpiling in staggering amounts (because it is), the central bank still has plenty of room for growth. Decades ago, central banks used to carry as much as 30% to 80% of their reserves in gold.
Analysts expect gold demand in China to continue rising as the nation works to devalue the U.S. dollar and prepare for the upcoming traditional wedding season next month.
“With the National Holiday looming, the demand and consumption for gold accessories will continue to rise,” Ye Qianning, an analyst at GF Futures in Guangzhou, explained.
With the import ban now lifted and demand expected to increase, we will likely see yet another net purchase month from China’s central bank, contributing to global bullion prices.
“It is very likely for the People’s Bank of China, the country’s central bank, to further boost its gold reserves,” Huang Jun, an analyst at financial trading platform FXTM, explained. “As China reduces holdings in U.S. debt, the country needs to increase holdings in other assets, and gold is a rare, high-quality credit asset in the current environment.”
China began its gold-buying streak in November 2022 and has since added 6.98 million ounces of gold to its reserves in the last ten months, giving the precious metal much-needed support as interest rates climb on a global scale.
As always, investors should consult their advisors before making any portfolio decisions.