China scoops up Russian gold, sets 5-year high for imports

China's gold imports from Russia jumped to a five-year high in 2022 as Western embargoes took effect and as Beijing likely sought to cut reliance on the U.S. dollar, analysts said.

Russia, which accounted for nearly 10% of global gold output in 2021, saw exports to China skyrocket from July through October as countries banned Russian gold imports. The world's biggest gold consumer bought 2.16 tonnes of gold products from Russia in October, surging more than 110% on a monthly and yearly basis and hitting the highest level since the record began in 2017, according to data that China's General Administration of Customs released Nov. 21.

China's gold imports from Russia — which include unwrought gold, semi-manufactured gold, gold powder, and gold plated with platinum — reached 5.72 tonnes over January to October, already surpassing the annual record of 3.98 tonnes set in 2021.

Still, Russian gold only accounted for 0.5% of China's total imports in the first 10 months.

Russian gold brands are suspended from the London Bullion Market Association's Good Delivery List "so a direct transaction would be a natural result," said Rhona O'Connell, group head of market analysis for Europe, the Middle East, Africa and Asia at StoneX.

Purchases have 'scope to grow' in 2023

China might import more Russian gold in 2023 as retail demand is expected to recover after China ends its zero-COVID policy, and the People's Bank of China, the country's central bank, is likely to keep stockpiling gold to diversify away from U.S. dollar-denominated foreign reserves, analysts said.

"Purchases certainly have the scope to grow," given that Chinese retail gold demand has yet to return to pre-pandemic levels, O'Connell told S&P Global Commodity Insights in a Dec. 1 interview.

China's gold consumption fell 4.36% year over year to 778.09 tonnes in January-September as stringent COVID-19 restrictions hurt consumer sentiment. Gold jewelry sales slid 1.31% year over year to 522.15 tonnes in the same period, while bar and coin dropped 10.46% year over year to 191.73 tonnes, according to the China Gold Association.

"If [COVID-19] is finally contained, then it is likely that as consumer discretionary purchasing increases in the part of the younger generations and investment purchases pick up among the older generations, then we should see an uptick in Chinese retail demand," O'Connell said.

It makes sense for China to buy more gold from Russia, which is the world's third-largest gold producer, said Bruce Yam, an independent foreign-exchange analyst based in Hong Kong.

China has not reported any increases in gold reserve holdings for three years, but analysts believe that the central bank is a major buyer of Russian gold as part of efforts to reduce reliance on U.S. dollar-denominated assets and as Washington expands its financial sanctions on Russia.

"Chinese central bank must be buying [Russian gold]; they have been selling off the [U.S. dollar-denominated] assets [for] a while," Samson Li, Hong Kong-based researcher for the Dutch Commodity Discovery Fund, told S&P Global Commodity Insights. "[China] saw what happened to Russia so they don't want to be holding too many [U.S. dollar-denominated] assets."

China's U.S. Treasury bond holdings fell to $933.6 billion at the end of September from $1.048 trillion a year earlier, U.S. Treasury Department data showed.

The Chinese government has been diversifying away from Treasury bonds into gold, reflecting a wider trend of central banks off-loading Treasury bonds amid the U.S. Federal Reserve's interest rate hikes and the growing possibility of a recession in the US economy, according to Yam.

Central banks bought 673 tonnes of gold in the first nine months of 2022, more than all annual purchases since 1967, according to the World Gold Council.

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