China stockpiling crude oil, gold amid sluggish post-pandemic economy

The Epoch Times has published an analysis saying that China’s post-pandemic economic recovery has fallen short of economists’ expectations so far this year, with various metrics pointing to a stalling landscape. Caliber.Az reprints the article.

Despite disappointing data coming out of the world’s second-largest economy, the country has been stockpiling crude oil and gold as if it were experiencing accelerated growth.

Gold Glitters in China

Earlier this week, the People's Bank of China (PBoC) announced that it increased the country's gold reserves for the ninth consecutive month in July. The central bank added 23 tons last month, lifting total stockpile volumes to 2,137 tons.

Gold imports to China totalled 792 tons in the first half of 2023, up 98 per cent year-over-year. However, gold imports slowed on a month-over-month basis in June, tumbling 29 per cent to 98 tons.

China has been on a gold-buying binge since November, adding 103 tons in the first half of the year. World Gold Council (WGC) analysts say the purchasing trend will persist in the second half.

The industry body also anticipates that other central banks, which have been some of the biggest gold buyers over the last 18 months, will continue to bolster their yellow metal inventories.

According to the WGC's sixth annual Central Bank Gold Reserves Survey, sentiment toward the precious metal remains positive.

"Seven in ten respondents believe that global gold reserves will rise over the next 12 months—a significant increase from last year's survey," the organization stated. "As such, we remain optimistic on central bank gold demand over the coming quarters, although it is unlikely to match the levels of demand seen in H2 last year."

ING analysts purport that the PBoC and other central banks have been scooping up gold as it is an attractive asset "in times of instability."

"We expect central banks to remain buyers, not only due to geopolitical tensions but also due to the economic climate," said ING commodities strategist Ewa Manthey in a note.

Meanwhile, Beijing has complemented its gold-buying binge with more robust mining output.

In the first quarter of 2023, Chinese gold mining production rose 3 per cent year-over-year "due to a combination of factors."

"The COVID disruptions experienced during Q1’22 were absent, and it appears that output was less disrupted by seasonal factors this year," the WGC explained. "Ongoing consolidation of the China mining industry is leading to improved operating practices that reduce the impact of harsh winter weather on mining."

Overall, demand in China and other Asian countries is strong, with China and India accounting for about 50 per cent of gold consumption.

Bloomberg reported in October 2022 that immense volumes of gold had been withdrawn from New York and other Western financial centres and were shipped east to satisfy demand in Shanghai's gold market.

There has also been speculation that China is buying gold in preparation for war.

And Russia, following its invasion of Crimea in 2014, resulting in U.S.-led sanctions, had been amassing huge volumes of gold and initiated a de-dollarization campaign. With gold accounting for a large portion of Moscow's war chest, the Kremlin has been able to mitigate the pain of being ousted from international financial markets.

The Chinese might be preparing for this climate, especially after leader Xi Jinping told the People's Liberation Army to "focus all its energy on fighting" in the event of war.

China Sipping on Texas Tea

Despite a sluggish economy—the second-quarter GDP came in at a lower-than-expected 6.5 per cent, and the manufacturing sector has been stuck in contraction territory for four consecutive months—China has been boosting its oil purchases.

In July, China imported an average of 10.29 million barrels per day (bpd) of oil, up 17 per cent from the same time a year ago. On a month-over-month basis, this was down from the previous month. However, crude imports in June totalled 12.67 million bpd, up more than 45 percent year-over-year.

In the first six months of 2023, total fuel oil imports spiked nearly 155 per cent year-over-year, according to S&P Global Commodity Insights.

Domestic gasoline supplies tumbled about 3 per cent from June to July, and diesel stockpiles rose approximately 2 percent during this span.

China continues to import hefty volumes of crude from Russia. With West Texas Intermediate (WTI) and Brent crude prices firming above $80 a barrel, Beijing could maintain its purchases of Russian Urals as they are trading at around $73 per barrel, which is above the price cap of $60 a barrel imposed by the G7 and the European Union.

Although China has been a net oil importer since 1994, Beijing has been looking to bolster local production. The Institute for Energy Research (IER) estimates that domestic output accounts for 29 per cent of the country's total crude consumption.

"Despite a slow return from COVID lockdowns and low overall demand, China is importing almost record levels of oil and upping its domestic oil production to near record levels, both due to ensuring energy security," IER wrote.

Natural gas has also played an integral role in the country's energy security efforts. China is poised to become the world's top liquefied natural gas (LNG) importer this year as companies plan to buy more of the energy commodity on a long-term basis.

China has been constructing a dozen new import terminals, which could lead to LNG imports doubling from current levels to 138 million tons by 2033, says Rystad Energy.

But strengthening Chinese demand could prove to be a headache for other LNG markets, particularly Europe.

"We consider the market to be fundamentally tight over the next three years, while waiting for new LNG supplies from recently sanctioned projects to enter the market," said Xi Nan SVP, LNG Market Research at Rystad, in a note. "That means we expect the market to be volatile going forward and react to events or shock to the balances that can come back on account of China in the LNG market, European industries, or LNG outages.”

Stagnation

Even with the vast purchases of energy and metals, market analysts anticipate that the Chinese economy could stagnate heading into 2024.

"Shattered investor and consumer confidence, shrinking demographics, property crisis, and deflation hints that the Chinese economy could be on the path for a longer period of economic stagnation. We could therefore see a rapid pullback in investor optimism regarding stimulus measures and their effectiveness," said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, in a daily research note.

China's trend rate of growth has eased to 3 per cent this year, down from 5 per cent before the pandemic, according to Capital Economics' China Activity Proxy.

"This is a steeper deceleration than in the years leading up to the emergence of COVID-19," said Julian Evans-Pritchard, the head of China Economics, in a report. "The official GDP data, while not fully reflecting the extent of recent weakness, are also consistent with a marked decline in trend growth. The main cause is not the pandemic but a structural shift in the property sector. This year’s underwhelming recovery is partly a consequence of this slowdown."

With strategists expecting authorities to employ more fiscal and monetary stimulus measures in the coming months, will officials continue to purchase enormous amounts of gold and crude oil?