On January 28, Chinese regulatory authorities announced extensive restrictions on short-selling (essentially betting against) Chinese stocks, and on February 5, 2024, the People’s Bank of China, China’s central bank, will amend its cash reserve rules in order to inject about $140 billion into the Chinese banking system. These are just the latest in a series of changes implemented by Chinese authorities as they respond to a cratering economy.
As regular readers of “Gold News & Views” know, I like to stay informed about any situation, regardless of its location, that could affect our clients’ portfolios—and from what I’ve seen thus far, it’s very possible that the economic situation in China could impact all of us.
China’s economy is facing multiple issues.
One of China’s largest sources of economic woe is its real estate market. Goldman Sachs estimates that the Chinese real estate market is worth $52 trillion, accounting for 29% of China’s GDP. Business Insider estimates that 70% of Chinese homeowners hold their wealth in real estate. And this market seems to be imploding: According to Business Insider, China’s second-largest real estate developer, China Evergrande Group, is $300 billion in debt.
The Chinese employment sector may be another source of economic stress. Recent reports by Reuters show that wages have stagnated and even fallen for many white-collar workers, youth unemployment has hit record highs, consumer confidence has fallen, and foreign money into China has slowed.
These economic troubles are reflected in Chinese stocks. According to Business Insider, stock markets in China have lost $6.3 trillion since 2021, while the American-listed Chinese stock index, the Nasdaq Golden Dragon China Index, has fallen to its lowest level since 2013.
China’s economic troubles could have macroeconomic repercussions.
The reason for this is simple: China is the world’s second largest economy. In a world where nations are so interdependent, any significant shift in a major world economy could have widespread effects.
For more insight into this topic—and what it could mean for our clients—I spoke with U.S. Money Reserve President and former U.S. Mint Director Philip. N. Diehl. According to his analysis, China’s economy presents four unique factors that could help support higher gold prices:
- A faltering Chinese economy could drive safe-haven buying of gold by the Chinese public.
- Weak Chinese import demand could undermine global growth, leading our own central bank, the Federal Reserve, to cut interest rates sooner than expected. This, in turn, would increase the appeal of gold bullion as a hedge asset.
- Contingency planning continues to drive strong gold buying by the People’s Bank of China.
- Rising geopolitical tensions can add pressure to economic tensions, which drive global safe-haven buying of gold.
All four of these factors are logical consequences of economic struggles in China—and may soon be reflected in the price of physical gold. In fact, The Financial Times published an article on January 30, 2024, noting that Chinese citizens are already looking to “buy gold as property and stock markets fall,” with one analyst from financial services firm BMO saying that “Gold exposure has become a necessity for Chinese portfolios as they continue to expect disinflation and income uncertainty.”
Consumers may benefit from buying gold before prices rise.
Since mid-December 2023, gold has remained above the $2,000/oz. barrier, possibly establishing a new baseline for future increases. As the factors mentioned above continue to play out, prices may rise even further.
China’s economy is not alone in supporting gold prices. Continued geopolitical volatility and uncertainty surrounding our own nation’s economic future have also been contributing to gold’s recent rise, and these factors also show no sign of slowing down in 2024.
Near the end of 2023, gold prices saw new record highs. If China’s economic concerns persist and gold prices are indeed set for another breakout year, now may be a great time to buy.
