It has been said before that the Chinese Communist authorities are implementing the so-called de-dollarization and must import large amounts of gold and hoard it. Now it seems that this hint is becoming clearer. Let’s start with this topic today. Next, we have to talk about the speech of the Chinese financial regulator about shutting down foreign accounts and preventing foreign investors from causing volatility in the Chinese stock market, which is also very informative.
One
In an unusual move on April 19, China’s central bank gave the green light and has allowed banks to import large amounts of gold, a move that could bolster gold prices that have been adjusting for months.
China is the world’s biggest gold consumer, consuming hundreds of tons of gold worth tens of billions of dollars a year, but its gold imports have fallen sharply as the coronavirus spreads and domestic demand dries up. As China’s economy has rebounded since the second half of last year, demand for gold jewelry, bars and coins has recovered, driving domestic gold prices above global benchmark rates and making it profitable to import gold. However, importing gold is not at the whim of importers and must be approved by the central bank. The central bank controls China’s overall gold imports by allocating quotas to various commercial banks.
The latest reports are that about 150 tons of gold will be shipped after the approval of the Chinese Communist government. The main importing countries are Australia, South Africa and Switzerland. At current prices, the value is $8.5 billion. This is the largest import of gold since 2019.
Now the question arises: why is the Chinese Communist Party importing gold at this time?
First of all, the reason for this, as mentioned earlier, is that China’s economy started to rebound after the epidemic, various commercial retailers started to open up, and the demand for gold started to recover, even to the point where there was this phenomenon of domestic gold prices being higher than international gold prices. The overall supply of gold is insufficient, and the Chinese Communist authorities are restricting private investment and consumption of gold, so the conflict between supply and demand of gold is getting more and more intense. It is urgent to increase the amount of gold imports to ease the contradiction between gold supply and demand.
Secondly, after nearly half a year of adjustment, from the monthly level, gold is now at the bottom and the bottoming is basically completed. With the rise of inflation in various countries, gold’s upward channel has basically been opened. The Chinese Communist authorities at this time to go out and purchase a large number of gold, can be said to be a very cost-effective deal, basically is only to make a profit, not a loss.
Finally, the most important point is that with the rising confrontation between China and the US, China’s de-dollarization in the financial sector is also accelerating. That’s because the yuan is currently anchored by the dollar. China, in conjunction with Russia, is now engaged in de-dollarization, starting with a currency swap between several countries and then settling in the local currency when buying oil and gas, reducing its dependence on the dollar. But de-dollarization is easier said than done. In the case of the yuan and ruble, which are non-international currencies, if not the dollar as the anchor, then what is the anchor? One has to find a credit backing behind it, so only gold. This is also the basis for the rapid hoarding of gold by both Russia and China over the past few years. Of course, this is also done to prevent gold from acting as an intermediary function for foreign exchange transactions after being kicked out of the dollar trading system.
So it is not surprising that a large amount of gold is being imported and hoarded while it is currently cheap. Of course, the imported gold is also to prevent the private sector from coming in for a share of the pie.
In the middle of last year, China’s major banks closed many gold investment products, including futures, spot and paper gold investments, on the grounds that they were too risky. In fact, on the whole, whether it is futures or spot, gold is still much less volatile than normal stocks. If you don’t restrict people from speculating in stocks, why should you restrict people from investing in gold?
Last year gold rose rapidly and said there was risk. But this year the performance of gold has been sluggish, such restrictions on investment in gold why not cancel the measures?
The country is rich or the people are rich, hide wealth in the country, or hide wealth in the people, in fact, has always been a pair of contradictions. Let the private investment trade gold and store gold, then the official hoarding will be more difficult, unless the copycat. So the best way is to restrict. Now the global currency over-issuance, gold anti-inflationary properties reflected more and more obvious. The people are known to invest in gold and collect it. These actually form a competitive relationship with the Chinese government. So it makes sense that the major banks restrict investment in futures, spot, and paper gold.
Two
Also on April 19, a speech by Fang Xinghai, vice chairman of the China Securities Regulatory Commission, drew a lot of attention from the market.
At the Boao Forum for Asia 2021 annual meeting, Fang Xinghai, vice chairman of the CSRC, replied on the topic of whether the massive entry of foreign capital after opening up would affect the stability of the stock market. Which is very informative.
His exact words were: foreign investors can suspend trading if they cause significant volatility in the stock market to prevent foreign investors from entering and exiting in a big way to cause instability in our market. The Shanghai-Hong Kong Stock Exchange and Shenzhen-Hong Kong Stock Exchange were designed with provisions in mind. For foreign investors to enter the A-share investment, the Securities Regulatory Commission “is clearly seen”. There are only three kinds of foreign capital coming in through the “two channels”, one is foreign retail investors, the proportion is very small and will not affect our financial stability; another is foreign hedge funds, insurance companies, funds engaged in global asset allocation, this is very welcome, but also the largest proportion of positions; another category is through foreign brokerage firms Another category is through foreign brokerage firms in the form of self-management, in fact, behind some hedge funds, such funds we are more concerned about.
The Shanghai-Hong Kong Stock Exchange and Shenzhen-Hong Kong Stock Exchange are the main capital channels for foreign investors to enter China’s domestic A-share market.
To the Shanghai-Hong Kong Stock Exchange, Shenzhen-Hong Kong Stock Exchange, for example, we first maintained a daily quota of in and out, in is 50 billion, out the total amount can not exceed 42 billion, then this will play a certain role in preventing. “Foreign capital to carry out investment began as early as 2002, but the more up-scale foreign capital into the capital market is 2018 after joining the MSCI, foreign capital into the mainland capital market more quickly.” According to Fang Xinghai, as of March 31, the percentage of foreign capital positions in the Chinese stock market was 5%.
According to the rules of Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect, if foreign accounts cause volatility in the stock market, shutting down these foreign accounts has also been long said. But the strange thing is why at this time to take out to emphasize this matter? There is only one possibility, and that is that the current withdrawal of foreign capital may have caused volatility in the Chinese stock market, making the Chinese financial regulators worry about the risk of a stock market crash.
In recent times, global stock markets have been hitting new highs, and only A-shares are still in a state of limbo, more than 10% away from their previous record highs. If we follow the extrapolation of the 2007 and 2015 stock market crashes, basically every time before a major turmoil in global stock markets such as the US, it is the Chinese stock market that goes wrong first. As a global commodity manufacturing base and as the world’s factory, China’s manufacturing sector is probably more sensitive to global monetary tightening and shrinking demand than the technology and finance dominated U.S. market.
The current uptick in U.S. 10-year Treasury yields and the beginning of the bottoming out of the dollar’s strength has mostly become a rallying cry for global capital to flow back to the United States. Brazil, Russia, Turkey and other countries are raising interest rates in response. The wave of foreign capital withdrawals can certainly make waves in the Chinese market as well. Some time ago, China’s banking system tightened restrictions on the entry and exit of foreign bank funds, so to speak, in advance of the preparation.
And on previous occasions, Guo Shuqing, chairman of the Communist Party’s Banking and Insurance Regulatory Commission, has also said on various occasions that he wants to strengthen financial risk prevention and prevent the transmission of financial crises from the periphery to China.
At present, China’s tightened regulation of foreign accounts in the stock market and tightened restrictions on the flow of funds in and out of foreign banks in China are all preparations for a possible financial crisis coming from the CCP. It can be said that they are still quite conscious this time, but I just don’t know if they can prevent such risks.
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