How China's growing importance will affect the gold market

News Arnulf Hinkel, financial journalist – 26.10.2018

China's power across the global gold markets is already immense. Within a relatively short period, the People's Republic has not only become the largest producer of gold, but also the largest buyer. At the same time, China's general political and economic prominence on the world markets has steadily increased. According to the International Monetary Fund, China alone accounted for roughly 30 per cent of global economic growth in 2017. And things are not likely to stop there. China has long been working intensively on a smooth transition from being a farming state, with centrally planned economy and state guarantees even for unprofitable companies, into a highly competitive global player. In the Process, many economic sectors, especially the financial industry, have to be liberalized or regulated differently in order to open them up to international markets without facing major problems.

Massive gold demand among institutional investors likely in the medium term

At present, institutional investors in China are still not allowed to trade gold. However, according to Daofu Chen, Deputy Director, General Finance Research Institute, Development Research Center of the State Council in China, this could change fundamentally within the next five to ten years. The necessary liberalisation would result in an enormous demand for gold, especially against the backdrop of persistently underperforming stock and bond markets and rising systemic risks in China, such as credit risks.

Private demand will continue to flourish

China's global leadership in gold demand is based primarily on gold and jewellery purchases by private households. Experience has shown that growing private wealth usually leads to rising gold demand. This is particularly true for the Chinese, who traditionally have a strong relationship with gold. Over the past 40 years, China's annual GDP has risen by an average of 8 to 10 per cent. During this period, a consistently growing middle class with considerable purchasing power has emerged. Together with institutional investors, it could further increase global demand for gold in the long term.

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