In my previous post on Shanghai Gold Exchange (SGE) premiums, we saw the Chinese central bank implemented a policy in early 2017, of raising a barrier cost at roughly 0.5% on gold imported into the Chinese domestic market. By comparing premiums on gold traded in the Shanghai Free Trade Zone (SFTZ) versus gold traded in the Chinese domestic market, it appeared that the People’s Bank of China (PBoC) generates an artificial premium. Using a similar approach, allows us to analyze if the PBoC obstructed gold imports in 2019. In my view it was very little. Certainly not 300-500 tonnes, which was the amount reported by Reuters on August 14, 2019. From Reuters:
China has severely restricted imports of gold since May , bullion industry sources with direct knowledge of the matter told Reuters
The world’s second largest economy has cut shipments by some 300-500 tonnes compared with last year
China is the world’s biggest importer of gold, sucking in around 1,500 tonnes of metal worth some $60 billion last year
In May, China imported 71 tonnes, down from 157 tonnes in May 2018. In June, the last month for which data is available, the decline was even sharper, with 57 tonnes shipped compared with 199 tonnes in June last year.
…quotas [PBoC import licenses] have been curtailed or not granted at all for several months, seven sources in the bullion industry in London, Hong Kong, Singapore and China said.
It has also restricted gold import quotas before—most recently in 2016 after the yuan weakened sharply, bullion bankers said.
As I mentioned in my previous post, in 2015 and 2016, the PBoC was defending a weakening renminbi by selling foreign exchange reserves. Late 2016 the PBoC had burned through $1 trillion worth of reserves. At that moment, the PBoC started restricting gold imports, and thus SGE premiums spiked to nearly 4%.
By comparing SGE premiums with Shanghai International Gold Exchange (SGEI, located in the SFTZ) premiums, we saw that when capital outflows declined in 2017, the PBoC continued “soft restrictions” on gold imports. Consequently, since 2017 SGE premiums have, on average, been at or above 0.5%.
For today’s analysis, let’s start with the following chart: SGE end of day premiums from January 2016 until December 2019 (sourced from the SGE website).