Chinese to Buy Even More Gold in Year of the Tiger

China has only 1.6% of its foreign currency reserves held in gold; but from 2003–2009 Chinese households bought almost 1,800 tons of gold, almost four times the purchases of the People’s Bank of China.

The Chinese Year of the Tiger, which has just started is reckoned to be an auspicious year for gold purchases. Superstitions aside the listing of gold futures on the Shanghai Futures Exchange is also an encouraging development.

Bond Buying Falls

U.S. Treasury bond purchases by China are also falling: from half of new issuance in 2006 to 20% in 2008 to an estimated 5% last year. No wonder some international banks think bond yields will have to rise substantially this year.

Clearly the focus has been on stimulating the Chinese domestic market in 2009 with a stimulus in the first half equivalent to half of national GDP. But no other nation has a more immediate danger from surging inflation. Recent agricultural price rises are far more worrying than a surge in high-end residential property prices.

For China is a victim of its own successful stimulus. Money supply increases of 30% have never been tried before on this scale. But less ambitious money supply boosts have almost always resulted in inflation in the past. China is no different.

It is therefore to be expected that the Chinese people will continue to buy the one money that will protect them against inflation in 2010, and last year China surpassed India as the world's top private gold consumer. The logic of a currency whose supply cannot be expanded is clear for investors who are very wise to be worried about domestic inflation.