government is encouraging investments in gold and is working to expand the
range of gold investments there. But the U.S.
and others believe that the Yuan is going to appreciate. Surely
the Chinese investor will be hurt if this happens?
government has been adding to its gold reserves, for at least six years now,
we believe. Local gold production is not leaving the country, nor
will it for years to come. At the same time the Chinese
government favors the development of new gold investment products, has opened
up gold markets and encouraged the major Chinese banks to sell gold across
This is a
particularly important development for the global gold market in the light of
the fact that per capita, the Chinese hold the least amount of gold amongst
the Asian nations. The savings propensity of the average Chinese
earner is remarkable, for they save around 40% of their disposable
income. To date these have been held on deposit at the banks,
with the more sophisticated venturing into the equity markets
there. But these in times of volatile ‘spikes’ can
behave more like gambling casinos than investment sources. Gold
in the Chinese mind represents true value and leads to financial security.
Consequently, the potential for gold buying in this nation of 1.4 billion
people who are in a rapid process of financial empowerment is tremendous and
could well, in time make China one of if not the most important investment
markets for gold.
restraint on Chinese gold buying, whether by individuals or the government,
is the small size of the global gold market. Persistent long-term
buying is the only way the acquisition of large quantities of gold can be
approached. Higher prices over time may well flush out sellers of
gold. So we expect Chinese gold buying to remain persistent for
the foreseeable future.
Will The Yuan
Appreciate as the U.S. wants?
For years now the
U.S. in particular has been calling for an appreciation in the
Yuan. Even the I.M.F. has told them that it is in the interests
of China to let the Yuan appreciate. But no heed has been taken
of such demands. Yes, the inscrutable Chinese have allowed the
West to get the impression that they may well let the Yuan appreciate, but a
look at the advantages to China of a pegged Yuan to the $ tell us the story.
reason for the pegging of the Yuan to the U.S. $ was to capture the price
advantage Chinese good had over the equivalent made everywhere
else. As the $ is the global reserve currency, such prices were
easily translated into other currencies. As we see by
yesterday’s export report for May from China the rise of 48% shows what
advantages such pegging and pricing brings as the world slowly
recovers. Yes import could be cheaper, but that would only save
money not promote industry. After all China wants and needs to
develop its economy.
We have been
touting the future role of the Yuan as a global reserve currency for well
over the last two years now. Since then we have
seen the tentative steps that the Chinese need to take to ensure their banks
can cope with this changed structure. Since expanding Yuan trade
in just Hong Kong, it is now spread throughout the main manufacturing hub of
Southern China. When they are ready, we do expect to see a flood
of Yuan to all their international trading partners, to pay for imports and
then to make Yuan available to pay for Chinese exports. As
Chinese trade is already global, there will be a point when Chinese importers
will price imports and exports in the Yuan. While this process is
in transition, we also expect their pricing policies to widen to include
allowing payment for Chinese exports in the broad spectrum of global
currencies. This will allow China to diversify its reserves and
lower its exposure to just the $ or the €.
internationalization of the Yuan happens there would normally be a tremendous
fall in the value of the Yuan as it floods markets, but in today’s
context that fall would be absorbed by the pressure for the Yuan that is now
being experienced. When it does happen, we believe that China
will want the Yuan to either hold current levels of in fact fall.
The Gold Price in
Having said all
the above, we have to ask you if you expect the Chinese government to promote
gold so strongly to its citizens, then knowingly engineer a fall in the Yuan
price of gold? Our view is that the Chinese government would not
wish to hurt its own like that, but with a large dose of forethought, would
have blended to two policies to the benefit of its own citizens.
If they didn’t what would happen to Chinese gold demand.
D. W. Phillips
Forecaster – Global Watch
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