Chinese Economic Stimulus Plan Could Boost Gold Demand

A recently announced Chinese economy stimulus package could provide a shot in the arm for the Chinese gold market.

China ranks as the world's number one gold consumer. 

World Gold Council China analyst Ray Jia called it a "stimulus bazooka." Reuters called it "the biggest stimulus since the pandemic."

The stimulus plan includes a package of interest rate cuts by the People's Bank of China to boost consumer spending. The package includes provisions to shore up the floundering housing market, along with fiscal stimulus, including a special government debt issuance to help low-income households and support to ease local government debt.

The Chinese CSI300 Stock Index jumped by 16 percent when the government announced the stimulus program late last month.

The Chinese gold market has been under pressure in recent months. Withdrawals from the Shanghai Gold Exchange (SGE), a proxy for wholesale demand, have been below average for several months. Record-high gold prices have supported investment demand but put a big dent in China's gold jewelry market. 

Jia said the stimulus measure would likely provide support for Chinese economic growth, which in turn would create "tailwinds" for the gold market.

"The anticipated rebound in economic growth will likely boost China’s gold demand. And as the largest components of that demand, we believe gold jewelry and bar and coin will be impacted the most."

Jewelry, along with bar and coin sales, are the primary drivers in the Chinese gold market.

According to the World Gold Council, economic growth is the fundamental driver of Chinese gold demand. Every percentage point of growth in China’s annual GDP leads to a 5.2 percent rise in gold jewelry consumption and a similar 5.1 percent increase in bar and coin buying, with all other factors held constant. 

Jia sums up the potential impact of the "bazooka" stimulus.

"Although it may take some time for the economy to fully digest the positive impact of the current and potential future stimuli, we believe improved consumer confidence and GDP growth should bode well for China’s gold demand in general."

There were already some signs of improvement in the Chinese gold market. Gold withdrawals from the SGE totaled 118 tons in September, an 11 percent month-on-month increase. The World Gold Council called it a "seasonal rebound amid active replenishment from jewelers in preparation for the expected sales boost during the National Day Holiday in October.

Inflows of gold into Chinese ETFs also flipped positive in September, with inflows totaling 1.2 tons. 

The fourth quarter is the peak season for Chinese gold buying.

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