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Category: Bullion Bulletin

Bullion Bulletin: China springs a surprise

China's central bank surprised markets last week by cutting its key interest rate, lowering the medium-term lending rate from 2.85% to 2.75%, the firs...

21 August 2022

Gary Mead

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China’s central bank surprised markets last week by cutting its key interest rate, lowering the medium-term lending rate from 2.85% to 2.75%, the first cut since January this year. This at a time when most central banks around the world are raising interest rates to try to stifle inflation. Inflation is creeping up in China, the consumer price index (CPI) annualised rate rising to 2.7% in July, the highest in two years but still far below the inflation figures for the US (8.5%) and the UK (9.4% in June).

China’s inflation is likely to remain subdued, largely because domestic demand remains weak thanks to the country’s zero-Covid policy, closing down cities where outbreaks occur. On the day the interest rate cut was announced the gold price dropped 1.3% on speculation that the interest rate cut was aimed at batting away indications of a recession, an economic downturn that would hit Chinese gold buying. Reports are that Chinese consumers are “more pessimistic about future income growth than they’ve ever been – even at the pandemic’s start in 2020 or after the [2008] global financial crisis”, which is encouraging them to cut debt and increase savings.

Figures for industrial production and retail sales in July showed sharply slowing year-on-year growth respectively of 3.8% and 2.7%, against expectations of 4.6% and 5%. This follows a modest 0.4% year-on-year expansion of the economy in the second quarter of 2022, and against the 4.8% in the first quarter. Beijing has set a target of real growth in gross domestic product (GDP) of 5%-plus for this year, but it’s unlikely to achieve that.

The Caixin Purchasing Managers’ Index, a closely watched indicator of the underlying state of China’s economy, dropped to a low of 36.2 in April this year; anything below 50 indicates contraction, while anything above 50 shows expansion. In June, it rose to a 13-month high of 51.7, a fragile return to expansionist mode; by July, the index had fallen again, to 50.4. Fears of a recession are widely discussed; according to the head of a major steel group almost a third of the country’s steel mills could go into bankruptcy, partly as a result of a slump in the property sector; the 100 leading property developers saw their sales drop by almost 40% in July. Youth unemployment (the ages of 16 to 24) has reached more than 19%. For an economy so dependent on sales of accommodation and for a government that needs to infuse its young people with optimism, these are worrying facts.

As for China’s gold demand, it’s currently stuck between Scylla and Charybdis, rather like the economy as a whole. Last year China’s demand for gold coins and bars rose by 44% year-on-year to 285 tonnes, according to the World Gold Council’s (WGC) latest annual report. Gold jewellery purchases reached 675 tonnes, a year-on-year increase of 63%. The WGC says China imported 107 tonnes of gold in June, “the highest in five months and significantly above the 2019 pre-pandemic level”. Chinese consumers, as price sensitive as any, have not lost their taste for gold or luxury objects; they might be finding it a little more difficult to afford the cost. Popular brands of luxury watches and bags have lost up to 50% of their value on the secondary market since Shanghai, China’s financial and commercial capital, imposed a strict lockdown in March. The WGC said recently that the outlook for gold in 2022 will be heavily dependent on the world’s two biggest consumers – India and China – to counter weaker investment demand. China’s demand in the second quarter of this year dropped by 31% said the WGC, partly as a result of the economic slowdown.

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