Are crashing Chinese shares benefiting gold?
Bangkok-Thailand (Jun 27) The big stock crash in mainland China on Friday may have awoken some investors, but others seem to have been already fearing it. Data recently released in Hong Kong suggests that some mainland investment money had been finding its way into gold.
According to trade figures announced Thursday by the Hong Kong Census and Statistics Department, mainland China in May imported 70.846 tons of gold through the territory. This marked a year-on-year increase of 35% and ended a declining trend in place since February.
On top of this, trade data from the Swiss Federal Customs Administration show gold exported to China that month shot up to 18.8 tons, an 809.6% year-on-year jump. The amount exported to Hong Kong was 68.475 tons, a 239.1% leap.
Switzerland's gold exports to China and Hong Kong have been on the rise since March, but not by triple digits.
Although these data sets do not show the whole picture of China's demand for gold, which is not fully disclosed, Simona Gambarini, a commodities economist at Capital Economics, a London-based research company, suspects the sharp rise in May "could have been driven by fears of a further correction in Chinese equities."
Gambarini said she believes the "sharp rise in the local equity market in China is likely to have weighed on gold demand in the past few months."
There were, in fact, partial signs in May that the mainland stock rally was decelerating. Even though the two small cap indexes in Shenzhen -- the ChiNext index, representing startups, and the small-and-medium enterprise index -- kept up their breakneck pace, with increases of 24% and 25%, during the month, the mainstream Shanghai Stock Exchange Composite Index saw its gain compressed to 3.8%. The two previous months had awarded the Shanghai index with double-digit increases.
The Hang Seng China Enterprise Index, consisting of mainland Chinese H shares listed in Hong Kong, actually dropped 2.3% in May after gaining 17% in April. This suggests international investors had become wary of the speed at which mainland shares were performing.
Gambarini, after observing the steep tumble on Friday, noted that "investors are becoming increasingly worried about a more pronounced correction in China's stock market and will return to gold to diversify their portfolio."
Since the options for mainland investors to divert funds away from equity are quite limited, gold could be one of the very few viable path.