BY TYLER DURDEN
SATURDAY, JUL 22, 2023 – 07:10 AM
By Jan Nieuwenhuijs of Gainesville Coins
By obstructing gold import and export the People’s 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 risks the gold market it supervises from functioning properly, and stagnates internationalization.
Introduction
The core responsibilities of the PBoC are to “maintain financial stability … and to maintain the stability of the value of the currency and thereby promote economic growth.” To this end it wants to strengthen China’s economic security by letting the population accumulate gold (source: page 27). Additionally, the Chinese central bank uses capital controls to manage the renminbi’s 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.
How to Measure PBoC Interference
Tracking if the PBoC is manipulating the SGE gold price by curtailing imports or exports is fairly easy: if the gold priceon 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. Gold 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 primer 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 Panda coins and a few other items I’m probably not aware of.
Please read more at the below link:
https://www.zerohedge.com/commodities/chinas-pboc-manipulates-shanghai-exchange-gold-price
