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Focus: China's gold rush
( 2003-09-25 11:10) (China Daily HK Edition)

Prominent gold experts and officials are urrging the government to lift the ban on individual trading in the precious metal as soon as possible, as quoted prices at the Shanghai Gold Exchange (SGE) continually hit record highs this month amid a surge in buying enthusiasm.

A woman shows a bar of gold in Wuxi, Jiangsu Province. Enthusiasm for individual investment in gold has always been high in China. [newsphoto.com.cn]

The introduction of individual traders, they say, would kill four birds with one stone, by invigorating flagging consumption, slashing the foreign trade surplus, trimming conspicuous foreign exchange reserves and easing international pressures on China to appreciate its currency.

It is "safe and feasible" for China to spend part of its foreign exchange reserves on gold imports, as well as place such purchases on the domestic market and open the market to individual players at the earliest possible opportunity, said Xi Jianhua, Bank of China's gold business expert.

About 20 per cent of respondents to a recent national survey said they were willing to spend 10 to 30 per cent of their savings in gold investment, indicating a huge potential demand for gold.

Outstanding individual bank savings in China hit 10.61 trillion yuan (US$1.28 trillion) at the end of July. After trying in vain for years to encourage a high growth rate in private spending, China has had to rely on proactive fiscal policies, marked by heavy government investment since the Asian financial crisis in 1997, to maintain fast gross domestic product growth.

Based on the survey results, Xi estimated that a possible injection of as much as 300 billion yuan (US$36.15 billion) in private money could flow into the gold market.

The money would create demand for about 3,000 tons of gold, he said. It would then only be natural for the country to expand imports as China currently has just 600 tons of gold reserves at its disposal, far from enough to cope with the potential gold rush.

In the initial stages, individual investors would create a market demand for 300 to 500 tons, according to analysts, and further growth would be gradual.

Spending on such a scale for gold imports would not have a significant impact on China's foreign exchange reserves, they said. Even if the anticipated 300 billion yuan worth of private investment was made right away, the country's US$356.5 billion worth of foreign exchange reserves at the end of July could cater for the demand with ease.

Using the reserves to purchase foreign gold would not only help withdraw billions of yuan now in circulation, but also boost the overall national import volume, Xi said, and thus "ease pressures on the appreciation of the yuan".

Xi's suggestions were echoed by Xu Shouxin, vice-director general of the China Gold Association.

Xu said the association has long proposed promoting individual ownership of gold, adding that the best way would be to allow commercial banks to start individual gold investment services at the earliest possible date.

He also stressed the need to spend part of the country's foreign exchange reserves on gold imports once the domestic market is opened to individual investors.

The time is now perfect for the government to make the move, say analysts, citing potential room for further hikes in gold prices, both in the domestic and international markets.

Rising prices

Gold prices in China have risen more than 15 per cent since the Shanghai Gold Exchange started operating last October, initiating free trade in gold for the first time in the history of the People's Republic of China. But its members are limited to 108 institutions, including producers, processors and traders of gold and gold products, plus commercial banks.

Staff at the Shanghai Gold Exchange follow closely the international gold prices. [newsphoto.com.cn]

The price of Au99.95, the type of gold used in the manufacturing of ornamental items, which was 83.5 yuan (US$10.10) a gram last October, climbed to a record high on September 22, closing at 102.21 yuan (US$12.31). Meanwhile, the price of Au99.99, gold reserved for investment-oriented speculation, which was 84 yuan (US$10.16) a gram last October, closed at 102.45 yuan (US$12.34) on September 22.

Analysts note that trade at the Shanghai Gold Exchange, dominated by Au99.95 in the beginning, is now marked by heavy transactions in Au99.99.

Meanwhile, prices of gold jewellery in Shanghai and other major Chinese cities also increased by 2 to 3 yuan (24-36 US cents) per gram this month.

Some SGE members have been increasing their stocks in anticipation of heightened demand once the market is open to individual investors, said an industry insider who declined to be identified. "These investors have been very active, taking every possible chance to buy in."

A gold analyst with the Industrial and Commercial Bank of China said the domestic gold market is following the appreciation trend of gold against the US dollar, predicting that prices will further rise following an influx of new capital at the Shanghai Gold Exchange.

International gold prices recently hit a six-year high of US$390 per ounce, exceeding the previous record of US$388 set in February when the US invasion of Iraq was imminent. Prices dipped to US$318.75 an ounce on April 7 in anticipation of a quick end to the war but started to bounce back as it dragged on, and the rising trend has gained strength since the beginning of this month.

Local analysts say the complicated situation in the Middle East, the world's oil barrel, and a sluggish international economy are the two main forces driving the increase in gold prices.

The slow restoration of peace and order in Iraq, escalating tensions between Israel and Palestine and the weaker-than-expected economic recovery in the United States, Europe and Japan have blunted consumer confidence and diverted a large amount of capital into the gold market, said Li Xisheng, an analyst with Qilu Securities.

Sluggish stock markets worldwide have also driven investors to the gold trade, Li said.

Xi noted that Japanese investors have been buying in substantial amounts of gold since the beginning of this month, while the appreciation of the euro against the US dollar has produced more opportunities for European investors in the gold market.

Other analysts even predict that international gold prices may surpass US$400 an ounce before the end of the year.

Short supply

As the world's third largest gold consumer and fourth largest gold producer, China is suffering from a long-term shortage of gold, said Li Xisheng.

The country's annual consumption is about 200 tons, while its production equals roughly 180 tons a year.

The Shanghai Gold Exchange, initiating free trade in gold last year for the first time since 1949, so far serves only institutional traders, rather than individuals. [newsphoto.com.cn]

According to the China Gold Association, national gold output hit 88.12 tons in the first half of the year, an annualized increase of 13.21 per cent. The industry created a profit of 974 million yuan (US$117.35 million), up almost 60 per cent from the same period last year due to rising gold prices and soaring demand.

However, analysts say, it is difficult for China to maintain major long-term growth in gold production because of limited natural resources and production capability.

In China, some 800 producers, each equipped to handle a daily capacity of more than 50 tons of ore, employ a workforce of 400,000. Their combined annual gold production capacity is 150 tons.

However, Li said, 80 per cent of these producers have a daily ore processing capacity of less than 200 tons each.

Small-scale production, a lack of the latest technology and management techniques, and low production efficiency keep most Chinese gold producers from being competitive enough, as do high production costs, he said.

Meanwhile, strong growth is expected in domestic gold demand over the long term, Li said, as individual incomes continue to increase.

-- First, per capita annual gold consumption in China is only 0.2 grams, far below that in Western and other Asian countries. The figure for India is one gram, while the United Arab Emirates averages the highest at 30 grams.

China is the largest potential jewellery market in the world, said Chu Xiangyin, an official with the China Council for the Promotion of International Trade. Consumption of ornamental objects topped 80 billion yuan (US$9.65 billion) in 2002 and has been growing by 15 per cent annually.

The market value should grow 10 times in 10 years, Chu said.

China is also on course to become a major manufacturer of gold jewellery in 2010 as a result of increased private spending power and lowered import tariffs, said Kang Xingzhou, vice-chairman of the China Gold Association.

Kang predicted that China's annual gold jewellery sales volume would reach 189 billion yuan (US$22.78 billion) by 2010, accounting for more than 10 per cent of the world's total.

-- Second, the demand for gold for industrial use will also increase rapidly as China becomes the world's manufacturing centre.

Currently, 90 per cent of the gold consumed in China is used to make jewellery.

-- Third, the potential for individual investment in gold as an option to currencies to maintain private wealth is almost unlimited.

Uncertainties about worldwide political stability and economic growth have strengthened this function of gold, Li said.

For instance, global investment in gold rose by 8 per cent in the fourth quarter of 2001 following the September 11 terrorist attacks, while growth for the previous three quarters was only 4 per cent.

Closer to home, gold prices in China surged amid plunging stock markets during the SARS outbreak earlier this year.

Such uncertainties may also bring about adjustments to China's foreign exchange reserves.

When China's foreign exchange reserves grow to US$400 billion and the ratio of gold in the reserves is brought to 5 per cent, according to Merrill Lynch, a new demand for 122 tons of gold will result. Gold comprised just 2.6 per cent of the US$286 billion worth of reserves at the end of last year.

For thousands of years, the Chinese have traditionally saved gold and worn gold ornaments, analysts reason. If the government does decide to allow individual investors into the sector, the landscape of the entire gold industry worldwide could change completely.

China's gold rush

The introduction of individual traders in the gold market will, according to gold experts and officials:

-- invigorate flagging consumption;

-- slash the foreign trade surplus;

-- trim conspicuous foreign exchange reserves;

-- ease international pressures on China to appreciate its currency.

As much as 300 billion yuan (US$36.15 billion) in private money is estimated to flow into the gold market, creating demand for about 3,000 tons of gold.

A market demand for 300 to 500 tons of gold will be created by individual traders in the initial stages.

Gold prices in China have risen more than 15 per cent since the Shanghai Gold Exchange started operating last October.

Prices of gold jewellery in Shanghai and other major Chinese cities increased by 2 to 3 yuan (24-36 US cents) per gram this month.

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