Last week, when the Chinese central bank announced it was holding 1,658 tonnes of gold, the entire financial media came up with huge headlines showing stupefaction about such an important increase since 2009, the last time there was an official update (1,054 tonnes). An increase of 57% in six years... should we be astonished? Actually, this number is far from being impressive: it only shows an 8% yearly increase, the same number (also official) as GDP growth. There is not much risk in betting that this number is cooked, largely under-estimated, and that the financial media will be out of superlatives when the next official announcement is closer to reality.
China extracts 400 tonnes of gold each year and none of it leaves the country; it also imports a little less than 1,000 tonnes a year, according to several estimates. Even if all this gold doesn’t end up in the central bank’s vaults, the real number is well above the announced 1,658 tonnes. In 2009, a group of civil servants and economists got together to discuss measures to be taken to increase the country’s gold reserves, suggesting they should reach 6,000 tonnes within the next three to five years, and possibly 10,000 tonnes in eight to ten years. This is the scope of the picture we must keep in mind.
But Beijing doesn’t want to use this card at this moment. It would be useless for now, since all the central banks around the world are printing money, the People’s Bank of China included, and there is no inflation, people still have trust and are not letting go of paper currencies. So why talk about gold, then? It will be a better time to talk about gold when defiance occurs and the Yuan has to be established on solid bases. In the meantime, China must keep a low profile.
The official number for GDP growth (7%) is also cooked as well. According to a study from Natixis Bank, based on real data such as power consumption, freight activity and imports, the real number is rather only 2%. This major decline is starting to show on the main stock market exchanges, Shanghai and Shenzhen, which are experiencing fall after fall. The government is doing what it can to hamper the fall, including halting trade on more than half the stocks!
Chinese “market communism”, finally, doesn’t seem that different from what we’re used to see in the other industrialised countries – interventionist States (high level of public spending, monetary printing), manipulated indices (U.S. unemployment rate is just as phony as the Chinese GDP), stock markets at their highest and an economic slowdown that must be hidden at all costs. This unstable situation, a mix of bubbles and deflation, bears the risk of a major crash. In the meantime countries, including China, must be able to tell the difference between a theatre show and a more complex, dark reality.
Reproduction, in whole or in part, is authorized as long as it includes a link back to the original source.
Philippe Herlin Finance Researcher / Doctor in Economics
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.