{"id":3828,"date":"2023-07-22T20:23:27","date_gmt":"2023-07-22T18:23:27","guid":{"rendered":"https:\/\/www.dhcab.com\/?p=3828"},"modified":"2023-07-22T20:23:27","modified_gmt":"2023-07-22T18:23:27","slug":"chinas-pboc-manipulates-the-shanghai-exchange-gold-price","status":"publish","type":"post","link":"https:\/\/www.dhcab.com\/?p=3828","title":{"rendered":"China’s PBoC Manipulates The Shanghai Exchange Gold Price"},"content":{"rendered":"
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By obstructing gold import and export the People\u2019s Bank of China (PBoC) greatly amplifies the gold premium or discount on the Shanghai Gold Exchange (SGE) relative to metal traded in London. In the past 12 months the PBoC has restricted gold import to curb capital flight and defend the renminbi, resulting in exaggerated SGE premiums. With these interventions the Chinese central bank\u00a0risks the gold market it supervises from functioning properly, and stagnates internationalization.<\/p>\n

Introduction<\/p>\n

The core\u00a0responsibilities of the PBoC\u00a0are to \u201cmaintain financial stability \u2026 and to maintain the stability of the value of the currency and thereby promote economic growth.\u201d To this end it wants to strengthen China\u2019s economic security by letting the population accumulate gold (source: page 27). Additionally, the Chinese central bank uses capital controls to manage the renminbi\u2019s exchange rate. A dilemma arises, for example, when Chinese people rush to buy gold as a form of capital flight, which undesirably weakens the renminbi.
Since 2016, there have been several periods in which the PBoC restricted gold imports into the Chinese domestic market to stem capital flight, lifting SGE premiums over the international benchmark (London spot). Remarkably, when there is no capital flight, and China is a net gold importer, the PBoC seems to aim at a 0.5% floor for SGE premiums.
Gold export from the domestic market is more or less prohibited by the PBoC. As a consequence, when the Chinese turn into net sellers, as happened in 2020, gold on the SGE trades at a steep discount versus London.<\/p>\n

How to Measure PBoC Interference<\/p>\n

Tracking if the PBoC is manipulating the SGE gold price by curtailing imports or exports is fairly easy: if the\u00a0gold price\u00a0on the SGE in the Chinese domestic market differs from the gold price on the Shanghai International Gold Exchange (SGEI) in the Shanghai Free Trade Zone (SFTZ), the PBoC is interfering.\u00a0Gold traded at both the SGE and SGEI is located in Shanghai and should not differ in price, lest the PBoC creates a discrepancy.
As I have explained in my\u00a0primer on the Chinese gold market, gold trading on the SGEI in the SFTZ is separated from trading on the SGE in the Chinese domestic market. Gold enterprises can freely import and export gold in and out of the SFTZ, while the PBoC controls import and export into and out of the domestic market. Fifteen or so banks are eligible to request the PBoC for a License (every batch needs a new License) to import into the domestic market. Export from the domestic market is prohibited, save for\u00a0Panda coins\u00a0and a few other items I\u2019m probably not aware of.
Simplified, the SGEI gold price is the \u201cuncensored version\u201d of the gold price in Shanghai.\u00a0The difference between the gold price on the SGE and SGEI reveals if there is any obstruction going on.<\/p>\n

A Short History of PBoC Interference<\/p>\n

My methodology allows us to observe interference since 2014 when the SGEI was launched. To get a sense of the PBoC\u2019s antics let\u2019s first examine a chart showing SGE and SGEI premiums against the US dollar price of gold in London.<\/p>\n

In the first years after the SGEI was erected, SGE and SGEI premiums coincided. Then, in 2016, the SGE premium started to drift higher than the SGEI premium because the\u00a0PBoC was battling capital flight.
When in 2017 the capital flight storm was over, however, SGE and SGEI premiums didn\u2019t realign. The PBoC kept stalling imports to set the SGE premium lower bound at 0.5%, as demonstrated in the next chart that shows the spread between the SGE and SGEI gold price in 2016 and 2017, based on granular intraday data I was able to obtain from that period.<\/p>\n

Possibly, the 0.5% base conceived by the PBoC is to make Chinese demand appear stronger (national pride) or create extra profit for importing banks.
In 2019 there was another stage of\u00a0capital flight\u00a0that made the PBoC step up blocking imports into the domestic market, pushing the SGE premium above 0.5%.
Around 2020,\u00a0the Chinese became net sellers as the price went up, though the PBoC wouldn\u2019t allow exports from the domestic market, causing gold on the SGE to trade at a steep discount to the price in the SFTZ and London. (For an explanation on why the gold price is set in the West, and the East tends to sell into bull markets, please read my article, \u201cThe West\u2013East Ebb and Flood of Gold Revisited.\u201d)
When the gold price stabilized in 2021 the SGE premium reverted to positive territory.<\/p>\n

Capital Flight Since 2022<\/p>\n

A useful approach to measure if the PBoC is interfering and why, is charting the spread between the SGE and SGEI gold price, and the renminbi\u2019s exchange rate versus the US dollar. It\u2019s mainly the gold price that influences Chinese supply and demand trends, but the renminbi\u2019s exchange rate can affirm if said trends are countered by the PBoC.<\/p>\n

\u201cCurrently, no new import quotas [Licenses] have been issued, and there have been no gold imports into China from previous issued,\u201d said Bernard Sin, regional director, Greater China at MKS PAMP.
Although the PBoC has restricted imports and exports almost continuously since 2016, it\u2019s hard to say how much metal has actually been blocked from entering or leaving the domestic market. On average China has imported 1,000 tonnes per annum since 2016.<\/p>\n

Conclusion<\/p>\n

At some point in the future the PBoC will need to cease interference for its gold market to continue functioning properly. The blocking of exports, for example, is a major problem.
China as a whole can buy gold in amounts tolerated by the PBoC but can\u2019t sell. What if the Chinese citizenry starts to fully grasp they can\u2019t sell at the international price at all times? Put differently, what\u2019s the point of owning gold if you can\u2019t sell?
All sorts of unintended consequences can be thought of. Perhaps, when the international price spikes drastically, people will sell to smugglers that arbitrage between the domestic market and abroad, dislodging the Chinese gold market as it was carefully designed by the PBoC. Or the Chinese people will lose interest in owning an asset that has limited upside.
Another issue is the\u00a0Shanghai Gold Benchmark Price\u00a0(SHAU), initiated in 2016, that should compete with the\u00a0LBMA Gold Price\u00a0auction held twice a day in London. SHUA is also set twice a day and the price discovered through its auctions serves as an international benchmark denominated in renminbi. At the\u00a0opening ceremony\u00a0of SHAU it was said to be a milestone for the internationalization of China\u2019s gold market.
But the\u00a0underlying contract\u00a0of SHAU is listed on the SGE, not SGEI. How successful can the Shanghai Gold Benchmark Price become if it\u2019s subjected to the PBoC\u2019s price manipulation in the Chinese domestic market? Which foreigners are going to use a benchmark that is detached from the international reality? The PBoC would be wise to eliminate confusion regarding these matters for the Chinese gold market to play a key role internationally.<\/div>\n<\/div>\n

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By obstructing gold import and export the People\u2019s Bank of China (PBoC) greatly amplifies the gold premium or discount on the Shanghai Gold Exchange (SGE) relative to metal traded in London. In the past 12 months the PBoC has restricted gold import to curb capital flight and defend the renminbi, resulting in exaggerated SGE premiums. […]<\/p>\n","protected":false},"author":1,"featured_media":3829,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[25],"tags":[],"class_list":["post-3828","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-global-issues"],"_links":{"self":[{"href":"https:\/\/www.dhcab.com\/index.php?rest_route=\/wp\/v2\/posts\/3828","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.dhcab.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.dhcab.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.dhcab.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.dhcab.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=3828"}],"version-history":[{"count":0,"href":"https:\/\/www.dhcab.com\/index.php?rest_route=\/wp\/v2\/posts\/3828\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.dhcab.com\/index.php?rest_route=\/wp\/v2\/media\/3829"}],"wp:attachment":[{"href":"https:\/\/www.dhcab.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=3828"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.dhcab.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=3828"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.dhcab.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=3828"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}