China’s Gold Rush Explained

David Pierson of The Los Angeles Times writes about the biggest driver behind China’s emergence as a major player in the global demand for gold, the Chinese consumer, which has turned to gold not only as an age-old status symbol but also as a way to hedge against personal financial risks:

To witness the frenzy firsthand, head to Beijing’s Caishikou Department Store, a four-story gold emporium that rang up sales of $1.5 billion last year. Visitors be warned: sharpen your elbows and be ready to push.

To buy a necklace, shopper Wang Li recently fought her way through a scrum of cash-waving customers hanging over a glass counter loaded with gold chains, Mao pins, pendants of Christ on the cross and more.

“I thought about buying Swarovski crystal, but I don’t think it will ever be as valuable as gold,” said Wang, a 24-year-old teacher who treats herself to a new piece of yellow-metal jewelry about once a month. “Besides, I like how feminine gold makes me feel.”

On another floor, customer Zhang Li waited in line to purchase gold bars, an investment he describes as the only safe bet left for ordinary Chinese.

“If I had invested in stocks or property last year, I would have lost money,” said Zhang, 36.

As Mr. Zhang says, and as Sydney University’s John Lee claimed in a piece for The Financial Times earlier this month, China’s consumer-driven gold rush is fueled by more than just a fear of inflation:

A better explanation could be the lack of alternatives for households that are the best savers in the world. In an economy lacking financial sophistication and depth, options are limited to savings accounts, which offer negative real returns, stocks listed on one of the two national exchanges, or else property.

The problem with stocks is that in most listed companies, state-owned enterprises hold a majority of shares. Combined with abysmal financial reporting, poor transparency and lax trading rules, stock prices are easily manipulated by insiders.

Property is the other alternative. But Chinese knew of the country’s infamous ghost cities long before the international media. Knowing that yield was irrelevant, as many of these properties will never be rented out, locals knowingly bought them as speculative capital assets. Now prices have collapsed in many areas, locals are much more wary of pouring capital into an asset that may never offer a reliable return.

See also recent CDT coverage of gold in China, where imports hit a record high late last year as the Chinese continue to blur the lines between retail and investment demand for the precious metal.

February 27, 2012 7:05 AM
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