Exclusive: China dampens gold imports as trade war heats up

LONDON / BEIJING (Reuters) – China has severely curtailed gold imports since May, source sources said, with direct knowledge of the case to Reuters, in a move that could be aimed at curbing dollar outflows and strengthening its yuan currency as a financial one growth slows.

The world's second largest economy has cut shipments by around 300-500 tons compared to last year – worth $ 15-25 billion at current prices, the sources said, and spoke on condition of anonymity because they do not have permission to speak to the media.

The restrictions come as an escalating trade confrontation with the United States has reduced China's growth rate to its slowest in almost three decades, pushing the yuan to its lowest since 2008.

China is the world's largest importer of gold, sucking in around 1,500 tonnes of metal into a worth about $ 60 billion last year, according to the toll data – equivalent to a third of the world's total supply.

Chinese demand for gold jewelery, investment bars and coins has tripled over the past two decades as the country has rapidly become richer. China's official gold reserves meanwhile increased five-fold to nearly 2,000 tonnes, according to official data.

Chinese customs figures show that they imported 575 tonnes of gold during the first half, down from 883 tonnes in the same period 2018.

In May, China imported 71 tonnes, down from 157 tonnes in May 2018 In June, the last month As data is available, the decline was even stronger, with 57 tonnes shipped compared to 199 tonnes in June last year.

The bulk of China's imports – from places such as Switzerland, Australia and South Africa and usually paid for in dollars – are carried out by a group of local and international banks that receive monthly import quotas from the Chinese central bank.

But quotas have been reduced or not given at all for several months, said seven sources in the bullion industry in London, Hong Kong, Singapore and China.

"There is virtually no issue of import quotas in China," said one source. In June and July, "next to nothing" was imported by banks, they said.

The Chinese central bank did not respond to a written request for comment.

Imports have not fallen to zero because some banks can still receive some quotas and other import channels, such as refineries that receive semi-pure mined gold, remain open, say four of the sources.

GRAPHICS: Import of Chinese Gold – tmsnrt.rs/2YEVuhE

They said that China's likely motive for restricting gold shipments was to help limit the amount of money leaving the country amid a plunge in the value of the yuan.

Beijing has previously taken steps to curb capital outflows as the currency weakened, such as squeezing the offshore yuan supply, cutting down on import billing and encouraging banks to send home dollars held overseas.

It has also limited import quotas for gold before – at the latest in 2016 after the yuan depreciated sharply, bullion bankers said.

But not to this degree. It is "unique," said an industry source in Asia.

"Gold that goes in is money that goes out," said one of the people, adding that Chinese buyers tend to buy dollars to pay for metal. "It all depends on what happens in terms of how the central bank handles the currency," said the person.

The yuan has fallen more than 10% against the dollar since early last year, and the central bank this month slipped below the key limit of $ 7 per dollar for the first time in more than a decade.

Although there is no clear official data to measure capital outflows from China, one popular measure is a component of the balance of payments called errors and deficiencies, which points to outflows of $ 88 billion in the first three months of this year, most on the plate.

GRAPHS: Chinese Capital Outflows – tmsnrt.rs/2YL19Tn

With $ 3.1 trillion foreign exchange reserves – the world's largest – China has the capacity to defend its currency.

But limiting gold imports is an easy way to limit outflow without affecting people's lives, said bullion bankers.

So far, the effect on the broader gold market has been dampened.

A sharp rise in prices has led many in China to buy gold for profit, increasing local supply, while rising demand elsewhere in the world has been strong enough to absorb extra metal.

Slow global economic growth is pushing more institutional investors, especially in Europe and North America, to gold, which is traditionally seen as a safe place to invest, while central banks are buying at the fastest pace for half a century.

However, the cost of gold in China may rise if the wave of recycled supply disappears before import restrictions are lifted, and supply could quickly outstrip demand outside China if institutional investors slow down purchases.