Chinese Investors See Comfort in Gold ETF

  • Commodity ETFs in China post biggest inflow of all countries
  • Capital flight elevates risks, Washington Crossing says

Why Money Keeps Flowing Out of China

Add a weakening yuan and capital outflows from China to the global forces helping boost demand for gold.

In the week through Monday, China attracted $52 million, the biggest inflow into commodity-linked exchange-traded funds of all countries tracked by Bloomberg. Huaan Yifu Gold ETF, China’s largest ETF backed by raw materials, is getting all the attention, attracting almost $72 million last week, more than enough to offset outflows from its peers. Globally, some $230 million was withdrawn from commodity ETFs for the week.

Money is moving to bullion as investors seek an alternative after the yuan sustained its worst annual loss against the dollar in more than two decades. Weakening currencies are bolstering demand for a haven at a time when concerns about the U.K.’s departure from the European Union and uncertainties over U.S. President-elect Donald Trump’s policies and a potential trade war with China are already driving gold prices higher.

“Chinese capital outflow has certainly elevated the risk to the financial system,” Chad Morganlander, a portfolio manager at Washington Crossing Advisors, which oversees $1.5 billion, said in a telephone interview. “It would be no surprise to me that Chinese gold ETF caught a bid under this elevated or increased concern about reserves, about the currency and about trade relations.”

Gold futures traded little changed at $1,212.70 an ounce at 8:41 a.m. on the Comex in New York, taking this year’s gain to 5.2 percent. Prices have rebounded since posting their worst quarterly loss in more than three years in December. 

An estimated $762 billion has left China in the 11 months through November, according to a Bloomberg Intelligence gauge of fund flows that doesn’t include outgoing yuan. Capital has been leaving the nation since 2014, as foreign investors cash out and local companies repay dollar debt amid a slump in the yuan. The nation’s foreign-exchange reserves fell for a sixth straight month in December, dropping $41.1 billion to a five-year low of $3.01 trillion.

Huaan Yifu attracted the third-biggest inflow into gold ETFs in the week through Monday, behind Frankfurt-listed Xetra-Gold, which got $172.9 million, and London-listed Source Physical ETF, which lured $73.6 million. ETF holders are bucking the trend in China’s jewelry market that saw the nation’s gold imports from Hong Kong fall in November to the lowest since January.

China’s attempts to prop up the yuan are tightening domestic monetary conditions and making a credit crisis increasingly likely, according to Kevin Smith, the Denver-based founder and chief executive officer of Crescat Capital, whose China bets in the global macro fund returned about 3.4 percent last quarter.

There are other troubles triggering capital flight and sending money to gold. The International Monetary Fund warned that China’s continued reliance on policy stimulus measures and the slow progress in addressing corporate debt raise the risk of a “sharper slowdown or disruptive adjustment.” The IMF issued the warning even as it raised the nation’s growth forecast for this year by 0.3 percentage points to 6.5 percent.

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