The Golden Answer to Chinese Import Data
Manufacturing data in the last several months has suggested that economic growth around the world is slowing.1 However, China’s export growth surprised the market this week and unexpectedly accelerated in April, even as shipments to the U.S. and Europe fell.2 This has created a conundrum for analysts and market watchers. How can China be growing while the countries that purchase its exports are slowing? The numbers don’t add up.
Digging deeper into these figures, several analysts have come to the conclusion that the numbers are faulty. Bank of America Corp. and Mizuho Securities Co. analysts have gone so far to say the figures have been inflated by fake reports. An “astounding” 92.9 percent jump in exports to Hong Kong, the most in 18 years, raises questions on data quality, researcher IHS Inc. said. They even call some of the data ‘absurd’, suggesting that exporters are ‘faking orders’ to obtain export-tax rebates. These observations challenge the credibility of Chinese economic data once again.
It is has been suggested that China’s robust appetite for commodities from iron ore to crude oil show that Chinese domestic demand is healthy, alleviating concerns about a renewed slowdown. China’s recent surge in gold imports puts this ‘increase in domestic demand’ observation into question. Our analysis shows that trade statistics are biased by the large gold inflows the country has experienced over the past few years. Because gold imports are accounted for in the “import” numbers of the current account (instead of the capital account like other investments), they artificially inflate the total import numbers published in the Financial Press. We say “inflate” because gold, unlike other materials, is mostly used for investment purposes and as such should not qualify as an import of “goods and services”, which is used to measure real economic activity. Now that China is importing significant quantities of gold, trade flow numbers are becoming more distorted.
When we strip out the ‘gold effect’, we find that 37% of the increase in imports over the last 12 months into China is due to the massive amount of gold that’s being imported. In Table A, gross imports increased by $82 billion, but $30 billion of this increase was from gold alone. Put another way, more than one third of China’s import growth has been solely from its citizens’ desire to own gold and not from a growing domestic economy.
|For the 12 months ending||Gross Imports||Gold Imports (tonnes)||Value of Gold Imports||Imports excl. Gold|
|(USD Bn)||(tonnes)||(USD Bn)||(USD Bn)|
Source: Bloomberg, General Administration of Customs (via Bloomberg), Census and Statistics Department – Hong Kong, Sprott Asset Management
Many analysts have attributed China’s increasing imports as signs of a healthy manufacturing sector, or increasing investments in infrastructure and property. Our simple analysis shows that more than one third of the increase in imports is due to China’s increasing gold consumption. We expect this will only increase in the near future when the explosion of gold buying in April is accounted for. New reports have suggested that Chinese housewives (affectionately known as ‘aunties’ according to the Beijing Daily newspaper) have purchased as much as 300 tons of gold in the past three weeks alone, worth almost $16 billion USD.3 This new gold buying could have a significant impact on Chinese import statistics and force analysts to reconsider the strength of the Chinese domestic economy.
1 JP Morgan posts mixed review on PMI data. Retrieved on May 10, 2013 from: http://www.manmonthly.com.au/news/jp-morgan-post-mixed-review-on-pmi-data
2 China Export Gains Spur Renewed Skepticism of Figures. Retrieved on May 10, 2013 from: http://www.bloomberg.com/news/2013-05-08/china-export-gains-top-forecasts-as-imports-exceed-estimates.html
3 Chinese housewives buy 300 tons of gold. Retrieved on May 10, 2013 from: http://blogs.marketwatch.com/thetell/2013/05/02/chinese-housewives-buy-300-tons-of-gold/
learn more »
Sprott Inc., a public company listed on the Toronto Stock Exchange, operates through its wholly-owned direct and indirect subsidiaries, including: Sprott Asset Management LP, an adviser registered with the Ontario Securities Commission; Sprott Private Wealth LP, an investment dealer and member of the Investment Industry Regulatory Organization of Canada; Sprott Global Resource Investments Ltd., a US full service broker-dealer and member FINRA/SIPC; Sprott Asset Management USA Inc., an SEC Registered Investment Advisor. We refer to the above entities collectively as “Sprott”.
The information contained herein does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation.
This report contains forward-looking statements which reflect the current expectations of management regarding future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as “may”, “would”, “could”, “will”, “anticipate”, “believe”, “plan”, “expect”, “intend”, “estimate”, and similar expressions have been used to identify these forward-looking statements. These statements reflect management’s current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant known and unknown risks, uncertainties and assumptions. Many factors could cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by the forward-looking statements contained in this document. These factors should be considered carefully and undue reliance should not be placed on these forward-looking statements. Although the forward-looking statements contained in this document are based upon what management currently believes to be reasonable assumptions, there is no assurance that actual results, performance or achievements will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this presentation and Sprott does not assume any obligation to update or revise.
Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any fund or account managed by Sprott. Any reference to a particular company is for illustrative purposes only and should not to be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any fund or account managed by Sprott will be invested.
Tuesday, November 26, 2013
Double, double toil and trouble. ‘Treasuries’ burn and ‘markets’ bubble
Friday, November 22, 2013
Rick Rule: Are Some Mining Stocks Heading Up?
Monday, November 18, 2013
19 ‘Tough’ Questions for Eric Sprott on Gold and Silver
Wednesday, November 13, 2013
Vaults are Booming! (in Asia)
Friday, November 8, 2013
Glum Resource Market Creates Value Plays: Adam Footer
Wednesday, November 6, 2013
How to Be Your Own Central Bank
Tuesday, November 5, 2013
Are Junior Miners Just Leveraged Gold Plays? -- Eric Angeli
Monday, November 4, 2013
Will Indians Keep Buying Gold?
Thursday, October 31, 2013
Number of existing South African gold, platinum mines likely to close
Wednesday, October 30, 2013
China Needs PGM's Now
Friday, October 25, 2013
Gold Mining: Is Turkey a Model Country?