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Will India lose its Golden Crown to China? - Outside View by Chirag Mehta
 
 
Will India lose its Golden Crown to China?

"China has a problem on its hands. It's called Saina Nehwal" reported a leading daily. The Indian badminton ace went on to win the Hong Kong Open defeating China's Shixian Wang - now that's a nice note to end the year on, wouldn't you say?

Well, Indo-China rivalry has long existed beyond the sports arena, fuelled on by obvious comparisons between the 2 neighbours - Where does India stand in comparison to China? India Vs China: Which economy is better after recession?, India and China...an economic comparison...

And so when China's gold imports for the first 10 months of the year had risen to almost five times 2009's total levels, people began to question - Will India lose its Golden Crown to China?

China's hunger for natural resources has set off a global commodity boom. Now, with its economy growing, the Chinese are exhibiting a ravenous appetite for consuming gold.

And, this looks to be just the beginning. The World Gold Council has predicted that Chinese gold consumption would double in the next 10 years, moving from 423 tons in 2009 to 846 tons of yearly consumption somewhere in the next decade. That's more than what we in India currently consume.

And that raises an important question - Currently the highest gold consuming nation, is India going to lose its crown to China?

While it may be a bit premature to expect Chinese gold demand to outpace the Indian demand, the gap between the two countries is narrowing for sure.

The big leap

Did you know that -

- In China, too, gold is regarded as a sign of prosperity, an ornament, a currency and an integral part of the culture and religion.

- Chinese weddings are important gold-buying occasions.

- Chinese people buy gold traditionally as a gift during the New Year.

- In China gold is considered an important symbol of wealth.

So much similarity between India and China as far as addiction to gold goes, isn't it? Experts opine that China is traditionally more affluent when it comes to gold consumption than India. In Chinese culture the children of rich Chinese families are said to be born not with a silver spoon as in Britain, but with a golden chopstick in their mouth.

Then why is gold consumption in China lower than that of India? And more importantly, why the sudden renewed demand for gold from the dragon nation?

Until the start of this decade, the Chinese gold market was tightly controlled by the Chinese Government. However China's gold market is now enjoying the benefits of liberalization and deregulation. Liberalization tends to have a dramatic impact in a local market. In India, for example, the advent of liberalization more than doubled the consumption of gold, from around 300 tonnes in the early 1990s to over 700 tonnes at the end of 2008.

Gold consumption in China has been on the rise due to the country's rapid economic growth and the continued improvements in the standard of living of its population. Chinese demand for gold has grown at an average rate of 13% per annum over the past five years.

But, is this trend sustainable?

Yes, China's demand has grown significantly, but it still remains low on a relative basis. China's per-capita demand for gold is quite low, especially given the high cultural value associated with the metal. The World Gold Council puts Chinese per-capita consumption at just 0.26 grams, much lower than the level seen in countries such as India or Saudi Arabia, both of which have similar "gold cultures."

Chart: Global Gold Consumption intensity
Source: World Gold Council

According to the World Gold Council, the Chinese per capita consumption for jewellery is one of the lowest at 0.26 grams as compared to countries having similar gold cultures. If gold were consumed at the same per capita rate as in India, Hong Kong or Saudi Arabia, the annual Chinese demand could increase by at least 100 tonnes to as much as 4,000 tonnes in this sector alone. The country's appetite for gold has grown, making China the second largest consumer in the world. However, the per capita demand in China has a lot of catching up to do to equal that of Western economies.

Investor's eyeing the golden pot

Ten years ago, China's Gold Investment demand was in the single digits. This year it is estimated to clock 150 tonnes up from 105 tonnes in 2009.

With governments' efforts to cool down real estate markets and the stock markets perceived as far run-up, investors are shifting to the safety of gold as a means of protection from escalating inflation. Also, where on the one hand, the government is increasingly getting worried about investments like real estate, on the other hand, the government has begun to relax its control over the gold market and is encouraging its citizens to buy gold. Investing in gold is getting easier for the Chinese, with more banks allowed to import gold and the approval for the formation of a gold fund.

VOLUME - one word to summarize China's economic policy, which is driven by aggressive industrial policy and backed by a population of over 1.3 billion citizens. Add to that the Chinese consumption which is as ravenous as their production capacities - Oh yes! And that's why investors should pay close attention when the Chinese take a national interest in gold.

The Intent

The question still remains - Will India lose its "No 1 gold consumer" title to China?

Well, let me put it this way: It's all in the intent with which the purchase is made.

Chinese demand for gold has been growing rapidly. To the Chinese gold has long ago equated real money. China's middle class is growing explosively alongside the overall development of the nation with increasing disposable incomes. Chinese consumers are high savers and are looking to gold to protect their wealth. They are buying it because it is seen as true wealth in all seasons.

Based on demographical and cultural studies of India, one may accurately conclude that its gold demand cannot go down unless the psyche of the Indians undergoes a sea change - a very unlikely event in the next few decades. Much of Indian buying also comes from rural areas with limited access to banking channels with intent of being a last resort under dire circumstances.

The issue lies with buyers in urban India, who have increased purchases on account of their outlook of higher prices in the future. Isn't this akin to betting on prices increasing?

Gold has to be perceived as a hedge against uncertainty, financial crisis, geopolitical concerns and more importantly a protection against currency devaluations and inflation.

As mentioned above, the intent of Chinese buying has largely reflected a means of protection against inflation primarily based on their belief of gold being real money.

Although, Indians are likely to keep consuming gold, the amount bought is unlikely to increase as opposed to China who seem to consume larger quantities of gold year after year.

Unless we get our intent right and treat gold according to its merit of being real money, it's highly probable that we may lose our golden crown to China.

Chirag Mehta is Fund Manager, Commodities for Quantum Mutual Fund and manages the Quantum Gold Fund ETF and the Quantum Gold Savings Fund among others.

Disclaimer:
The views expressed in this Article are the personal views of the author Chirag Mehta and not views of Quantum Asset Management Company Private Limited(AMC), Quantum Trustee Company Private Limited (Trustee) and Quantum Mutual Fund (Fund). The AMC, Trustee and the Fund may or may not have the same view and DO not endorse this view.

 

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