Chinese switch from property to gold

China is poised to become the world’s biggest market for gold this year, thanks to soaring investment purchases of bullion and steadily rising jewellery sales, according to the World Gold Council’s annual report.

Last year gold sales to China shot up 20% on the previous year to 769.8 tonnes, the council said in its gold demand trends report. The fastest growth was in sales of gold bars and coins for investment: total investment purchases rose 69% in 2011 to 258.9 tonnes, worth 84.5-billion yuan (R103.4-billion).

The data suggests that China’s new rich are turning to gold to protect their wealth as the government seeks to tame the country’s giddy property prices.

“It is likely that China will emerge as the largest gold market in the world for the first time in 2012,” said Marcus Grubb, the council’s managing director for investment.

China’s demand for jewellery increased every quarter of last year until it jumped into first place as the largest single jewellery market worldwide for the second half of 2011, according to the council. India remained the world’s biggest market for gold last year, although demand fell 7% to 933.4 tonnes. Gold jewellery accounted for the lion’s share of purchases at more than 500 tonnes. Investment purchases were 366 tonnes in India.

“India and China continue to believe in both the intrinsic and emotional value of gold jewellery,” the report stated.

Investors take refuge in gold
Worldwide, weak property prices and volatile stock markets have sent investors hurrying to buy gold as a safe haven, pushing gold prices to a record $1895 an ounce on the London PM fix on September 5 last year. Global gold sales were 4 067.1 tonnes in 2011, worth an estimated $205.5-billion. The report said it was the first time that global demand had exceeded $200-billion and the highest tonnage level since 1997.

Confirmation of China’s growing appetite for gold comes as the country’s central bank made its latest move in a delicate balancing act between maintaining growth and curbing high inflation by easing controls on bank lending. The People’s Bank of China announced on Saturday it would allow a 0.5% cut in banks’ reserve requirement ratios — to 20.5% in most cases. The ratio caps the amount of their deposits that banks can lend. Easing it means more loans can flow into the economy.

The ratio is widely viewed as a more effective form of corporate credit control than interest rates in China, where state firms can readily obtain loans on favourable conditions thanks to local political connections. It was tightened six times last year, but this is the second time it has been eased since November, suggesting the bank is more worried about preserving growth than cooling inflation.

China’s economy grew 9.2% last year, cooling to 8.9% in the final three months of the year.

Meanwhile, inflation has dropped from a peak of 6.5% mid-last year to 4.1% in December, though an upward blip to 4.5% in January suggests it is not fully under control.

For China’s wealthy, property has long been a reliable source of investment. But the government has tightened up on housing loans and second homes to bring down house prices.

Gently deflating China’s property bubble without crashing the cement, steel and construction and retail sectors remains central to its efforts to produce an economic soft landing and ease middle-class angst.

Fan Jianping, director of the State Information Centre’s economic forecasting department, told the Financial Times he estimated that real estate prices would drop 18% in 2012, after falling 27.9% in 2011. —

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