China’s Gold Market Showcases Impressive Growth Amid Economic Recovery

In February, China’s gold market saw notable price growth and record inflows into exchange-traded funds (ETFs), reflecting not only current consumer demand but also an optimistic outlook for the domestic economy. As highlighted by Ray Jia, the Research Head for China at the World Gold Council (WGC), various factors, including international price movements and local currency depreciation, played significant roles in this upswing.

Price Performance and Currency Influence

Gold prices experienced a surge internationally during February, with even more pronounced advances in China. Jia pointed out that the gold price’s relative outperformance in Chinese Renminbi (RMB) was largely attributed to a 0.5% depreciation of the local currency during the month. “Although gold prices adjusted lower in the latter half of February, they continued to refresh records during the period, both in USD (on 11 occasions) and RMB (on six occasions),” Jia mentioned, indicating the dynamics at play.

Despite the strength observed early in the month, the latter part saw an adjustment that could indicate a potential plateau. “Our analysis shows that market momentum, generally lowering yields, and a weaker dollar drove gold higher,” Jia explained, emphasizing the multifaceted causes of price fluctuations.

Wholesale Demand Trends

It’s important to note that wholesale demand for gold saw a seasonal decline, with a 28% month-over-month fall in gold withdrawals from the Shanghai Gold Exchange (SGE), dropping to 90 tonnes in February. This decline follows a typical trend wherein wholesalers and manufacturers tend to lessen their purchases post-Chinese New Year celebrations, allowing for inventory replenishment to occur beforehand. “Every February on record—except 2023—has seen a month-over-month decline, averaging 41% over the past ten years,” Jia stated. As expected, weaker demand in February resulted in a decrease in the Shanghai-London gold price spread.

However, caution is warranted as the year-over-year outlook portrays an even more concerning picture. Jia noted, “The soaring local gold price continues to suppress local gold jewelry demand in tonnage terms, leading to weaker stocking activities among jewelry manufacturers, who account for the lion’s share of SGE withdrawals.” As such, investment demand for gold remains robust, but it wasn’t sufficient to offset the jewelry sector’s frailty, resulting in a noted 29% year-over-year drop in total withdrawals for February.

Record ETF Inflows and Investment Optimism

On a positive note, investment in gold on the mainland has been remarkably strong, with Chinese gold ETFs registering record-level inflows. Jia reported that Chinese gold ETFs added RMB 14 billion (approximately US$1.9 billion) in February, marking it as the largest-ever monthly inflow. This uptick in inflows, alongside a rising gold price, pushed these ETFs’ total assets under management (AUM) to RMB 89 billion (about US$12 billion), an all-time peak. Total ETF holdings also rose by 21 tonnes to settle at 131 tonnes, further establishing new heights.

Much of this investment interest can be traced back to the spike in local gold prices post-Chinese New Year, especially noticeable on February 5, and concerns surrounding the Trump administration’s trade policies that may have ushered in safe-haven flows.

Central Bank Activity and Future Outlook

Furthermore, the People’s Bank of China (PBoC) extended its purchases of sovereign gold for the fourth consecutive month, recording another 5 tonnes in February. At the end of the month, China’s official gold holdings reached 2,290 tonnes, the highest on record, accounting for 5.9% of the nation’s foreign exchange reserves. In the first two months of 2025, Chinese gold reserves increased by a total of 10 tonnes.

The World Gold Council maintains an optimistic outlook, believing that China’s economic recovery signals a potential revival in the gold market’s underperforming sectors. Jia noted that key indicators, such as manufacturing and composite PMIs, exceeded market expectations in February, alongside a significant surge in new loans during January that reflects effective policy stimulus aimed at fortifying credit.

Moreover, a modest uptick in consumer confidence was observed in January, presenting a silver lining on this front. As the ‘two sessions’ concluded with an official growth target of 5% for 2025 and stronger fiscal measures including a higher deficit-to-GDP ratio of 4% and anticipated interest rate cuts, the conditions seem poised for gradual improvement.

Conclusion

In conclusion, if gold prices stabilize and China’s economic prospects continue to brighten, there is a reasonable expectation that the gold jewelry sector will recover. The investment appeal for gold remains strong as investors are likely to anticipate further price gains, exacerbated by ongoing uncertainties surrounding trade policies. Overall, the combination of positive economic data and strategic monetary policies paints a promising picture for the gold market moving forward.