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August 14, 2012

China Not Alone in Economic Slide: Time for Central Bank to Boost Gold Holdings?

China is most likely to see its annual growth at 8%, its slowest full-year of growth since 1999 & the slowest pace of growth for Q2 in more than 3 years. China July Exports rose just 1% from a year ago and new loans were at a 10-month low added by the fact that factory output rising has been seen at its lowest pace in 3 years and pricing power fading. Chinese Economic growth has slipped for six successive quarters. 
The first hard data of the third quarter in China has led some analysts to question the strength of what was expected to be the start of a shallow rebound in the economy. July imports rose 4.7% from a year earlier, the weakest pace since April and also well short of expectations for an increase of 7.2%. Export orders fell in July at their fastest rate in eight months as per the purchasing manager’s figures in last week’s data showed. Minister, Chen Deming, had said in June that China would be lucky to achieve its 10% trade growth target in the second half of the year. A fall in consumer inflation in July to a 30-month low of 1.8% should reassure policymakers they have some room to relax policy.

China not alone in the slide:

Taiwan on Monday posted a fifth straight month of decline in exports in July, dragged down by double-digit drops in shipments to China, Europe and the United States, while South Korea’s July exports were the worst in nearly three years.
“We think the central bank should move as quickly as possible to stabilize the economy. I expect there will be at least one more RRR cut and interest rate cut this quarter,” Xiao Bo, economist at Huarong Securities in Beijing, told Reuters. Some economists say the central bank could move as early as this weekend to ease policy. It has reduced banks’ Required Reserve Ratio (RRR) in three steps since November to free up an estimated 1.2 trillion yuan ($190 billion) for new lending and cut interest rates in June and July. Net new bank lending in July of just 540 billion yuan versus expectations of 690 billion yuan is a big potential cause of concern. Bank loans are the main credit creation mechanism in the economy, which is only in the early stages of reforming capital markets to boost available sources of corporate finance.
The low figure adds to fear of faltering demand from China’s two biggest foreign customers – the European Union and United States- which had already seen economists, peg back their consensus call for annual export growth to 8.6 percent in a Reuters poll last week. Excluding a fall in exports in January, the 1% rise in July is the weakest since November 2009 and marked a big pullback from annual growth in June of more than 11 percent, Reuters data shows. Shipments to the European Union dropped more than 16%.

Once Bitten – Twice Shy, Sensibly:

The Chinese government though is conscious of the risk of loading the economy up with too much cheap credit, as it did during 2008-09 when it unveiled a 4 trillion yuan stimulus program and let local governments go on a borrowing binge that saw them rack up some 10.7 trillion yuan in debt by the end of 2010. Analysts think as much as 2-3 trillion yuan of those loans may have turned sour and might never be repaid. Beijing does not want a repeat performance and it could be one reason for July’s relatively muted new loan data from China.

China Gold Demand on Expected devaluation of the US Dollar:

Chinese economists have recommended the authorities to increase the volume of the World’s largest gold producer, China’s Gold Reserves six-fold. Analysts however said it does not mean that Beijing will start buying Gold Bars immediately but it is clear that China’s Gold Demand will rise significantly.
Unlike other large economies China has relatively modest Gold Reserves. The share of Gold in China’s total reserves is not more than 2%. Currently China owns about 1,000 tons of Gold about as much as Russia has only for now. As it becomes clear from the Central Bank of China’s report, which was published earlier this month, the Chinese government does not rule out the second wave of the economic recession in the world. Amid such gloomy forecasts Beijing’s confidence in foreign currency is weakening.
Fluctuation of the Euro and US Dollar rates which is typical of the crisis period does not encourage Chinese people. For this reason China has begun to pay attention to gold, which proved its reliability. In the last 16 years, the price of troy ounce of gold rose in average by 10%. If Beijing really starts to buy gold bars within the year it will soon provoke a drastic hike of Gold Prices. But the quantum of 5,000 tons of Gold is comparable with a 2-year volume of global gold production. It might take China more than 8 years to buy this amount.
China’s intention to significantly increase its Gold Reserves may be aimed at the suspected massive devaluation of the US Dollar. China is currently the main creditor of the US. China holds trillions of US Dollars and if it tries to convert part of these reserves into Gold, this will inevitably lead to a gigantic devaluation of the US dollar in the global financial markets. The US Dollar devaluation Forecast… Some analysts believe that China will be buying gold gradually without doing any sensitive damage to the American currency because otherwise Chinese people will also suffer from it because it may lead to devaluation of a part of the reserves they are holding in US Dollars as reported by thevoiceofrussia
Indian Gold Reserves:
RBI holds 557.75 tonnes of Gold as part of foreign exchange reserves. The Gold held by RBI is revalued on monthly basis as per accounting policies. On steps taken to boost Gold Reserves in the coming years, RBI had purchased 200 tonnes of Gold at the cost of USD 6.7 billion from the International Monetary Fund (IMF) as part of the foreign exchanges reserves management operations in 2009.

Courtesy CommodityTradeMantra.com - Comprehensive market intelligence

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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