China’s SGE gold flows still at high level – 51t last week

by Lawrence Williams, For the second week in a row, gold withdrawals from China’s Shanghai Gold Exchange (SGE) have been at around 50 tonnes – a high level for the post Chinese New Year period. Withdrawals from the exchange for the first 16 weeks of the year have already reached around 780 tonnes suggesting that if flows out of the SGE are maintained we could be in for a new record year with withdrawals well in excess of those of 2013, which totalled almost 2,200 tonnes. As we have said in these pages before, whether one considers SGE withdrawal figures to equate to Chinese gold demand, which the Peoples Bank of China would seem to suggest, or whether the true consumption figure is actually quite a bit lower as the mainstream gold analysts reckon, they still remain an excellent indicator of demand growth or fall in the world’s biggest market for the yellow metal. Time was when Chinese mainland net imports from Hong Kong were considered the best proxy for Chinese demand and up until just over a year ago this was very much the case with the majority of Chinese gold imports coming in by this route. But since then the Chinese have opened up the routes by which gold can be imported and we suspect that now at least 40% of gold imports, probably even more so far this year, go directly into the Chinese mainland via ports such as Shanghai and Beijing, thus bypassing Hong Kong altogether. For example, perhaps the most important route for gold into China is from the UK to Switzerland, where the gold is re-refined into more suitable sizes for the Asian markets, and then on to China. Bloomberg reports that, for example, in March 46.4 tonnes of gold were exported from Switzerland directly into China with only 30 tonnes going to Hong Kong – around a 60:40 ratio. The fact that such a high percentage was thus going directly to the Chinese mainland received little or no comment despite this being such a significant switch in the gold trade route. This compares with figures late last year which had a little over 30% of Swiss gold exports to China and Hong Kong going directly to the mainland with the balance to Hong Kong. It was also noted that US trade statistics for gold exports showed that in early 2014 nearly all the gold exported to China and Hong Kong was directly to the latter, while by late in the year 36% was going directly to the mainland (See: 36% of October U.S. gold exports to China went direct rather than via Hong Kong). Thus Hong Kong, as a trade route for gold into India, can no longer be considered a proxy for Chinese demand and reports suggesting otherwise should be ignored. Indeed, one of these was the recent Reuters article headed China’s gold imports from Hong Kong dipped to 7-month low, with the article seeming to imply that this meant that Chinese demand was falling off sharply too. The report ended with the sentence “China does not provide official trade data on gold, so the Hong Kong figures serve as a proxy for flows to the mainland”. As noted above, in our view they no longer do and should be totally disregarded as such an important indicator nowadays, although Hong Kong still remains an important gold import route. China is now reported to be further relaxing its restrictions on import routes in allowing Chinese mining companies with overseas gold mining subsidiaries, to import their gold directly to the mainland too, as well as allowing more banking entities to import directly. All this could make Hong Kong increasingly less relevant as an import route for gold into China.

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