First things first, Chinese gold demand is still very strong and it’s in a uptrend since July.
Apologies for my late reporting on the latest SGE withdrawals numbers – which are the best benchmark for Chinese gold demand. I was trying to figure out some details on gold trade rules between the mainland and the Shanghai Free Trade Zone. I still haven’t got confirmation, so will get back to it.
Chinese wholesale gold demand is at least 1541 metric tonnes year to date (inc. week 42 – until October 17). Shanghai Gold Exchange (SGE) withdrawals, as disclosed by the Chinese SGE reports, were 52 tonnes in week 42 and according to my estimates China has approximately net imported 991 tonnes year to date.
Perhaps the ones with a sharp eye noticed the title of this post claims Chinese gold demand is 1541 tonnes year to date, but in the chart above we read total SGE withdrawals stand at 1547 tonnes year to date. Do SGE withdrawals still equal Chinese wholesale gold demand? Not anymore, sadly.
What Has Changed?
Since September 2013 I’ve reported every week on Chinese gold demand measured by withdrawals from the SGE vaults, as my research has pointed out this was the best benchmark to use. The game is changing, though, now the Shanghai International Gold Exchange (SGEI) has launched in the Shanghai Free Trade Zone (FTZ). In terms of trade the FTZ must be considered as a separate country from China mainland.
The new subsidiary of the SGE has not completely opened up the Chinese gold market to the world, gold bullion is still prohibited to be exported from China. Technically speaking the SGEI serves two functions; it’s a satellite exchange for the rest of the world to trade gold in renminbi, additionally the SGEI can be used by Chinese banks, that have a PBOC gold import license, to buy gold and subsequently import the bullion into the mainland (click here for a comprehensive analysis of the SGEI). Since the launch of the SGEI, the withdrawal numbers from the SGE and SGEI are disclosed enumerated, which distorts our view on Chinese gold demand in the mainland.
To be as conservative as possible on Chinese gold demand I applied the following math to SGE withdrawals numbers in the past weeks. I subtracted the weekly volume traded on the SGEI from withdrawal numbers just in case all buyers on the SGEI opted to withdrawal their gold from the vaults in the FTZ and re-exported it anywhere but the mainland.
Chinese law dictates all gold bullion imported into the mainland (in general trade) by commercial banks is required to be sold first through the SGE. If gold is imported into the FTZ it’s officially not imported into the mainland. The thing I’m not sure about at this stage is, if Chinese banks buy gold on the SGEI, withdrawal this from the vaults in the FTZ and import it into the mainland, is this required to be sold through the SGE again (?). My common sense would say no, but I need to have it confirmed by the SGE.
From Detailed Rules for Physical Delivery of the Shanghai Gold Exchange (the International Board is the SGEI):
Each Domestic Member and Domestic Customer may withdraw physical bullions deliverable on the Main Board from an MB Certified Vault, but is not permitted to withdraw physical bullions deliverable on the International Board from an MB Certified Vault. Except for those members and customers qualified to import and export gold, no Domestic Member or Domestic Customer is permitted to withdraw bullions from an IB Certified Vault. Any Domestic Member or Domestic Customer that has gold import and export qualifications may withdraw physical bullions deliverable on the International Board from an IB Certified Vault.
Recently the Bank of Shanghai (BoS) has imported 500 Kg from the SGEI vaults (IB Certified Vaults) into the mainland. As we could read on Antaike, I’m not a member of Antaike but I could see this headline on October 23:
Let’s assume the BoS imported this gold on October 15. And let’s assume the imported gold was not required to be sold through the SGE again. If we remain as conservative as possible we can make the following calculation:
In week 42 (October 13 – 17) 51.5 tonnes were withdrawn from the SGE and SGEI vaults combined. SGEI trading volume that week was 3.8 tonnes and of this 0.5 tonnes was imported into the mainland. My conclusion would be Chinese wholesale demand was at least, based on the data we have, 48.2 tonnes (51.5 – 3.8 + 0.5). In this fashion I also calculated Chinese wholesale gold demand year to date; it was at least 1541 tonnes.
SGEI trading volumes are still tiny at this stage, thereby, my SGE contact told me SGEI withdrawals are small. So for now total withdrawal numbers are quite accurate for Chinese gold demand, however, this will change. I expect for this year (2014) we can still make good estimates of Chinese gold demand, for next year the numbers might get more blurred. Unless new numbers will be disclosed by China which we can use as tools to clear our view, all in an effort to keep track of gold demand in the mainland, even more important, to make estimates of how much gold is imported from the rest of the world. I hope to have more facts from the SGE by next week in order to report as precise as possible on Chinese gold demand and import.