China's gold lust is making folks nervous, plus Xi makes odd trip to Europe to clear path for Chinese EVs-- China Boss News 5.10.24

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What happened

China's Q1 2024 gold purchases raised its reserves from 2,235 tons to 2,262 tons, according to the World Gold Council’s latest report.

The additional 27 tons is part of a record People’s Bank of China buying streak that, analysts say, has been occurring for “17 straight months.”

“China has now been buying gold steadily since October 2022” boosting its holdings by 16% and driving up global gold prices dramatically, The Telegraph’s Melissa Lawford said.

“Gold is currently trading near a record high of $2,343 per troy ounce, valuing Beijing’s stockpile at $170.4bn,” she added.

But ordinary folks in China are also joining the buying “frenzy,” according to the New York Times.

A teacher in Beijing told news staff that she “started buying gold in 2020 at the outset of the pandemic.”

Ms. Zhong has already amassed “more than two pounds” of gold, and says “she was inspired by an old saying: ‘Jade in prosperous times, gold in troubled times.’”

Why it matters

Doomsday preppers

There are good reasons for Chinese nationals to top up their gold stores these days.

Although their government has tried to project confidence, investors are deserting China in droves over concerns about the economy.

A chief investment officer at a Hong Kong wealth management firm told Financial Times in December that the lack of confidence in China’s pandemic recovery “goes beyond real estate, although real estate is key.”

“I’m referring to consumer confidence, business confidence and investor confidence — both from domestic and foreign investors,” he explained.

Coincidentally, quantitative finance expert George Calhoun wrote a fresh perspective published in Forbes last week on why that is (see The Missing Factor In Explanations Of China”s Economic Distress: Covid (Part1: The Cover-up) here), and for an overview of the some of the more shocking moments in China’s 2023 economic downturn, check out my year-end review, Top Story of 2023: China’s failed economic recovery (here).

Suffice it to say that Beijing’s crackdown on overbuilding and over-leveraging in the property sector - which makes up nearly a third of the country’s economy - is threatening to bankrupt small, medium, and large investors, as well as every sort of up- and downstream ancillary industry you can imagine, from construction( 7% of GDP), mining, manufacturing of construction material, metal and mineral products, to machinery and equipment, consumer home goods, home improvement and property-related services. Local governments’ coffers are also busted.

But Beijing began stockpiling gold long before the entire economy turned south. Increased purchased began just “after the U.S. Treasury Department took the rare step of freezing Russia’s dollar holdings under sanctions imposed on Moscow,” New York Times staff said.

Guan Tao, a global chief economist at Bank of China (BOC), a majority state-owned commercial bank, told NYT that China used to use renminbi to increase its gold reserves.

But “this time, the bank is using foreign currencies to buy gold — effectively reducing its exposure to the U.S. dollar and other currencies,” he said.

Breaking Taiwan and the dollar

About the same time as China began ramping up its gold acquisitions, other countries, especially those with emerging markets, like India, also began buying more to backstop public finances. They also feared increased buying sprees, like China’s, would make future acquisitions unaffordable.

According to Forbes India, even in ordinary times, holding more gold “instills confidence” in national markets, boosts the value of national currencies, and can be used in diversification strategies to offset “fluctuations in the value of other assets” or as a hedge against the dollar.

The U.S., itself, is the world’s largest collector of gold - dwarfing Germany, Italy, and France - who come in second, third and fourth - with a whopping 8,133.46 tons.

Fifth- and sixth-placed Russia and China - even with their increased purchases - still held only about a quarter of that, 2,332.74 and 2,235.39 tons, respectively, at the end of 2023, Forbes India said.

But we’re not really talking about normal times.

And understanding why Beijing has directed its central bank to increase gold reserves by hundreds of tons rather quickly over the past few geopolitically-tensioned years - as well as why Chinese banks are now streamlining the conversion of cash into gold for regular bank depositors - seems relevant to a number of emerging strategic issues.

British analysts told the Telegraph that Beiijin’s stockpiling “was likely an effort to guard its economy against Western sanctions in the event of a conflict over Taiwan.”

“The relentless purchases and the sheer quantity are clear signs that this is a political project which is prioritized by the leadership in Beijing because of what they see is a looming confrontation with the United States,” Jonathan Eyal, associate director at the Royal United Services Institute (RUSI), said.

Sir Iain Duncan Smith MP, co-chair of the Inter-Parliamentary Alliance on China, thought “it will give them a bit of padding to be able to ride through some of the difficulties.”

Another reason Beijing is chopping gold chunks out of global holdings, some say, is to fill “the cracks in the foundation of dollar dominance.”

Earlier this year, BRICS, a group of Global South countries, led by Beijing and who have expressed a desire to move away from the dollar, admitted Egypt, Ethiopia, Iran, the United Arab Emirates, and Saudi Arabia as new members.

Mike Maharrey, journalist and market analyst for MoneyMetals, noted that “[t]he expanded BRICS has a combined population of about 3.5 billion people with markets worth over $28.5 trillion,” while its members “make up roughly 28 percent of the global economy,” and “account for about 42 percent of global crude oil output.”

“Exchanging dollars for gold represents a significant power shift,” and “the movement of gold from West to East could set the stage for a gold-backed currency that would challenge dollar dominance,” he warned.

This Week’s China News

The Big Story in China Business

XI MAKES ODD TRIP TO EUROPE TO CLEAR PATH FOR CHINESE EVs: As you might expect, much was made - and written - about Xi Jinping’s trip to Europe. I categorized the trip as China Business news because that is what the Chinese leader - despite awkward talks about Russia’s war in Ukraine - was trying to make it.

Besides backing Russia's war in Ukraine, the biggest risk to China's relationship with Europe is its dumping of green tech products.

Xi’s visit comes on the heels of a nasty European Commission letter sent to three of China’s top EV makers - BYD, SAIC and Geely - that warned “their lack of cooperation” in ongoing subsidies investigations “frees its hands to impose higher penalties,” as Politico last week reported.

‘Not a hugger’: But Xi’s trip was strange for a number of reasons.

First, as Financial Times columnist Gideon Rachman, duly noted: “If you are making your first trip to Europe in nearly five years, an itinerary that reads France, Serbia, Hungary seems a little eccentric.”

That said, neither Rachman, nor anyone else, was under the impression that Xi’s Grand Tour with Chinese characteristics was anything more than a “charm offensive” with “threatening undertones”devised to “disrupt the unity of both Nato and the EU.”

Weirder still is how France’s president, Emmanuel Macron, continues to imagine himself le séducteur of autocrats.

Monsieur le Président arranged a cozy affair to snuggle with China’s strongman in the Pyrenees, where he “gifted Xi a woolen blanket made in the Pyrenees, a Tour de France jersey and armagnac from the nearby southwestern region - a brandy which is at risk of Chinese trade sanctions,” Reuters said.

Recall that France’s leader - a product of the elite Grandes Ecoles - failed to convince the Russian siloviki to leave Ukraine in peace in 2022.

On Tuesday, among the spectacular “mountains dear to Macron as the birthplace of his maternal grandmother,” efforts to get the China’s most powerful despot in decades to stop supplying Russia’s war and to reduce trade imbalances were, by all accounts, also ignored.

Raphael Glucksmann, who leads the French Socialists' in the European Parliament, told RTL that "Emmanuel Macron attempted this narcissistic diplomacy of 'I flatter the tyrant' with Vladimir Putin for five years, with the Bregancon fort ... the camaraderie.”

"And all that ended with what, the invasion of Ukraine and the threats to our democracies," Glucksmann said glumly.

A European diplomat told Politico that “Xi was the ‘winner’ of the visit, having ‘cemented his image as the 'ruler of the world' where westerners are begging him to solve European problems in Ukraine".

And Reuters staff seemed thankful not to have to report another Macronian “embrace, hug, wink at or slap” during the Chinese leader’s visit to Paris.

Xi “is not a hugger,” they said.

Law and International Xi

US SANCTIONS OVER A DOZEN CHINESE FIRMS FOR AIDING RUSSIA’S WAR IN UKRAINE: The US targeted “more than a dozen” Chinese companies last week as part of a new round “of nearly 300 sanctions on international suppliers” aiding Moscow “restock its arsenal” for the war in Ukraine,” New York Times reported.

“The Chinese companies that are facing sanctions are accused by the Treasury Department of providing Russia with infrared detectors, components for Russian drones and pressure sensors used in Russian missiles,” Times staff said.

The latest penalties follow Treasury Secretary Janet Yellin’s trip to China last month, where she explicitly warned Chinese firms and banks that supporting the Russian military would have “significant consequences.”

Sanctions were also applied to firms in Azerbaijan, Belgium, Turkey and the United Arab Emirates.

Broadened effort to stop Russia: But in a press statement, the Treasury Department singled out China for helping Moscow “sustain its war machine.”

“The United States, along with many international partners, is particularly concerned about entities based in the People’s Republic of China (PRC) and other third countries that provide critical inputs to Russia’s military-industrial base. This support enables Russia to continue its war against Ukraine and poses a significant threat to international security,” officials said.

United States-based lawyer Dan Harris, a founding partner of Seattle international law firm Harris Sliwoski and co-author of the China Law Blog, called the Biden Administration’s latest effort to halt Russia’s attacks on Ukraine “a significant development,” and “a wake-up call for businesses worldwide about the risks of doing business with China and with potentially sanctioned parties.”

“[The Treasury Department’s] announcement of new sanctions targeting Chinese entities underscores the volatile nature of global trade amid escalating geopolitical tensions. As relations between China and the Western world continue to strain, and with the ongoing intensification of the war in Ukraine, businesses should begin now to prepare for the additional sanctions impacting additional Chinese companies. This evolving situation necessitates a vigilant and informed approach to Chinese engagements,” he said.

Geopolitics 

XI GETS RED-CARPET IN SERBIA, HUNGARY AS EUROPE LOOKS ON: “Chinese and Serbian flags were hoisted all over Belgrade on Tuesday for the arrival of Chinese President Xi Jinping,” Euronews said.

Xi's state visit to Serbia was well-coordinated to make maximum propaganda use of the 25th anniversary of the 1999 Chinese embassy bombing in Belgrade “by a US Air Force strike during NATO's Kosovo campaign in 1999.”

Sven Biscop, Professor of European Foreign Policy and Security at the University of Ghent, said “the memory [of the bombing] is kept artificially alive, so that it can be solicited whenever it is deemed necessary, to pile on the pressure when they need it.”

In recent years, Serbia has - and it’s difficult to put this mildly- become a Chinese vassal state, where “Chinese capital owns factories and mines, builds roads, and is financing the construction of a railway line between Belgrade and Budapest.”

Coziest deal in Europe: China’s investments in the tiny Balkan state (pop. 6.6 million) are already worth billions and Xi was in town to bribe - ahem, I mean offer - Serbian officials many billions more as part of a new free trade agreement, called - wait for it - “Shared Future.”

Euronews described “Shared Future” as “a slap in the face to Brussels.” The deal was penned just after “allegations that China embedded a spy in the office of a far-right German MEP,” and it’s underpinned by Chinese EV expansion at a time when the EU is threatening Chinese automakers with tariffs for dumping.

Victor Gao, Vice President of the Center for China and Globalization, told Euronews Serbia that "China and Serbia share everything together, we see the world very much through similar lenses and we fully understand the need to respect each other, helping each other whenever necessary.”

"And then, if Serbia can also become a very important manufacturing centre for EV cars, it will accelerate this transformation from fuel cars to EV cars,” he said.

But “Serbia’s Western partners view the country as a Chinese hub at the gateway to the EU,” Reuters said.

Older friends: Serbia has been a candidate for EU membership since 2012, but Hungary - who, according to AP News, “received Xi in an opulent courtyard of Budapest's Buda Castle” with another red-carpet roll-out while the Hungarian military played China’s national anthem, is already a member.

“Beijing has invested billions in Hungary and sees the EU member as an important foothold inside the 27-member trading bloc. In December, Hungary announced that one of the world’s largest EV manufacturers, China’s BYD, will open its first European EV production factory in the south of the country — an inroad that could upend the competitiveness of the continent’s auto industry,” news staff said.

Best Reads 

The Missing Factor In Explanations Of China’s Economic Distress: Covid (Part 1: The Cover-Up) (George Calhoun, Forbes): Calhoun, the Quantitative Finance Program Director at Stevens Inst. of Technology, has a brilliant take on the pandemic’s lasting impact on China.

Why Xi Jinping is afraid to unleash China’s consumers (Joe Leahy, Financial Times): Leahy explains the reasons Chinese leader Xi Jinping won’t free Chinese consumers to engage in badly-needed consumption with “cash transfers” and “deeper economic reforms.”

China's Mouthpieces Go Quiet (David Bandurski, China Media Project): Bandurski does a deep dive into Tuesday’s highly unusual lapse in Chinese state media publications.

Middle Kingdom Surreal

CHINA’S FAR-SIDE LUNAR MISSION CARRYING PREVIOUSLY UNDISCLOSED ROVER: New images of China’s Long March-5 appear to show a “previously undisclosed lunar rover” likely part of plans “to bring back to Earth the first ever samples from the lunar far side,” Space News said.

China launched its largest rocket on May 5th to make the world’s first attempt at far-side lunar exploration.

“China had disclosed objectives, a landing site and science payloads for the mission ahead of launch. However, following launch, the spacecraft’s maker, the China Academy of Space Technology (CAST), revealed an image showing a rover attached to the mission lander.”

It’s unclear whether the images were revealed intentionally or not.

Space News said that “a mention of a Chang’e-6 rover [was also] made in a post from the Shanghai Institute of Ceramics (SIC) under  the Chinese Academy of Sciences (CAS).”

“It suggests the small vehicle carries an infrared imaging spectrometer. The payload would utilize how different minerals and compounds absorb and emit infrared radiation in characteristic ways to determine the composition of rocks, soil, and regolith on the lunar surface. This could be used for water detection,” analysts said.

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