Chinese Savers Turn to Gold as Rest of the World Exits Holdings

(Bloomberg) -- Even as investors shed gold holdings almost everywhere else in the world, Chinese savers like Hu Jingjing are buying.

Stung by a $5 trillion stock-market collapse, an overbuilt property market and a devaluation of the yuan, Chinese investors are adding to bullion holdings that have already made them the world’s largest consumers of the metal. A third straight annual decline in prices has failed to deter purchases, partly because there are few attractive alternatives for preserving assets.

“It’s been a very tough year for investment because shares are so volatile and bank deposits are threatened by a weakening yuan,” Hu, a 36-year-old manager at a clothing retailer, said after buying a 30-gram bullion bar for 7,865 yuan ($1,232) at a jewelry store in Beijing on Nov. 4. “I don’t think gold is going to drop any more and I can sell it back to them if the price goes up.”

China imported the most gold in 19 months from Hong Kong in September, following the surprise devaluation of the yuan in August and a rout in domestic shares that was the biggest since the global financial crisis. Even the central bank has been accumulating the metal, announcing in July that reserves were up 57 percent since 2009 and adding to holdings each month since then. While the stock market has recouped some of its losses, investors continue to withdraw gold from the bullion exchange in a sign they are still worried about the economic outlook.

The economy of China, the world’s second largest, is expanding at the slowest pace in a generation, and shares in Shanghai are down about 30 percent from their peak in June. The devaluation in August triggered the biggest one-day drop in the yuan since the country ended the dual-currency system in 1994, spurring concern the government would continue to weaken the yuan to boost exports and economic growth. A construction boom over the past two years left a surplus that discouraged real- estate investment.

“Investors still prefer gold as they don’t have many alternatives,” said Haywood Cheung, permanent honorary chairman of the Chinese Gold & Silver Exchange Society in Hong Kong. He predicted consumption in mainland China this year may exceed the record seen in 2013. The society’s members include the world’s largest listed jewelry chain, Chow Tai Fook Jewellery Group Ltd., and Chow Sang Sang Holdings International Ltd.

Demand surged in the third quarter, especially for bars and coins, reversing a downtrend through June and pushing consumption in the first nine months to 813.9 metric tons, up 8 percent from a year earlier, the China Gold Association estimates. For the whole year, demand may climb as high as 1,000 tons, says Zhang Yongtao, the group’s vice chairman. That would match estimated purchases by India, according to estimates from Gitanjali Gems Ltd., one of the biggest retailers in the South Asian country.

A jump in physical deliveries from the Shanghai Gold Exchange this year is another sign of demand. The so-called withdrawals climbed to 2,165 tons through Oct. 30, not far off the record of 2,197 tons for all of 2013, when a 28 percent plunge in prices ignited demand. China’s net imports from Hong Kong soared 77 percent in September from a month earlier to 96.6 tons, the most since February 2014, Hong Kong customs data show.

While China is buying, global investors have been selling. Prices slumped 19 percent from the 2015 high in January to $1,064.55 an ounce on Nov. 18, the lowest level in more than five years, as the Federal Reserve moved closer to raising interest rates. Goldman Sachs Group Inc. expects gold to drop to $1,000 next year on further interest-rate increases.

Holdings in exchange-traded funds backed by bullion have plunged 43 percent from their peak almost three years ago and are now about the smallest since 2009 as global investors sought returns in other markets, according to data compiled by Bloomberg. The assets fell 5.8 percent this year to 1,507.2 tons as of Wednesday.

Stabilizing financial markets in China may weaken demand for gold. The benchmark stock index has advanced more than 20 percent from its low this year, after a state rescue effort encouraged investors to buy shares. A measure of the yuan’s volatility has fallen as the government pushes for the currency to be included in the International Monetary Fund’s reserve basket. IMF Managing Director Christine Lagarde said last week she supports the move and the board will consider it on Nov. 30.

“While we expect gold demand to continue strengthening through the year-end because of buying geared to weddings and the Lunar New Year, the surge in demand we saw in the third quarter may slow,” said Long Ling, analyst at Industrial Futures Co. in Shanghai.

--With assistance from Ranjeetha Pakiam.

To contact Bloomberg News staff for this story: Feiwen Rong in Beijing at frong2@bloomberg.net To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net James Poole