Gold Demand Growth in China Expected to Stagnate

On 11 May 2012, Bloomberg reported that there were expectations about a possible stagnation of gold demand growth in China. Since China happens to be among the world’s largest gold consumers, second only to India, a potential decline in demand growth is likely to have a negative impact on gold prices.

Bloomberg quotes Xin Zhihong, the Vice President of Lao Feng Xiang Co., mainland China’s biggest gold jewellery maker. According to Xin Zhihong, the volatility and decline in gold prices observed since September as well as the slower economic growth have resulted in “subtle changes” in the attitude of Chinese consumers. Generally, consumers expect that gold prices will always rise and that the value of gold can only increase, however, this is not the case anymore, with Xin Zhihong pointing out that Chinese consumers are now waiting with cash in their hands, unsure whether to buy. Xin notes, as quoted by Bloomberg, that Chinese consumers usually buy gold when prices are rising and refrain from buying “when prices are conceived to be on a downtrend”. Nevertheless, the Vice President expects that sales at the Shanghai-based company may grow at least 20 percent in 2012, although he is not that optimistic about the market as a whole.!m[](/uploads/story/15/thumbs/gold_bars_2_inline.png)

These predictions do not correspond to the projections of the World Gold Council, an association of leading gold mining companies. As noted in the Bloomberg article, in February 2012, the industry group forecast that this year China may displace India as the biggest gold consumer on an annual basis. According to World Gold Council data, last year China consumed 769.8 metric tons of gold in jewellery and investments by individuals, an increase from 639.2 tons in 2010 and 392.7 tons in 2008.

Yet, China’s economic growth declined to 8.1 percent in the first quarter of 2012, with the Chinese premier Wen Jiabao setting a 2012 growth target of 7.5 percent, compared to the 8 percent growth target in place since 2005. And while Wen Jiabao notes that the lower growth rate is supposed to make China’s economic development more sustainable and efficient, there are concerns that the slower economic growth will hurt luxury consumption which in turn will have a negative impact on China’s gold demand growth. On 14 May 2012, Bloomberg reported that Chow Tai Fook Jewellery Group Ltd. dropped to a record low in Hong Kong trading amid concerns about China’s economic growth.

Emily Li, brand general manager at Chow Sang Sang Holdings International Ltd, the second largest gold and gem-set jewellery seller by market capitalisation in Hong Kong, also notes that since the financial crisis in 2008, this is the worst start of the year for the industry as a whole. Yet, the company’s sales in mainland China grew by more than 10 percent in the first quarter from a year ago, which Emily Li contributes in part to the Year of the Dragon, which is popular for weddings and births. Yet, it remains to be seen whether the Year of the Dragon would be enough so as to offset the effects of slower economic growth on China’s gold consumption.