SHANGHAI - Gleeful traders
expect China's billion-plus people to play the gold market
- restricted for decades - with gusto when it opens
this December. Gold-jewelry sales should benefit from falling
taxes and more competition, thanks to reforms, partly
driven by World Trade Organization (WTO) agreements.
However, despite rising incomes and inflation, prices
and sales may not match expectations.
The Shanghai Gold Exchange's
(SGE) 13 commercial-bank members should offer spot trading of 10-gram
lots via gold accounts, similar to stock-market accounts,
from December if all goes to plan. "We are testing a
new trading system that can realize futures,
forwards, deferred and personal individual trades," said
Jesse Yang Ming, SGE senior manager. "China is the
world's fourth-biggest producer and one of the biggest
consumers. It plays an important role in foreign
exchange and will grow as an investment vehicle as
China's economy grows and incomes rise," he told Asia
Times Online.
With stocks dreary and bank accounts
- where Chinese have stashed savings equivalent to
40% of the country's gross domestic product (GDP) -
offering little, gold's popularity might wax. "The
Chinese like gold. The securities market is in poor
shape, so attention is turning to other investments,
like gold," said Yang.
Parallel to bars,
bullion and coin trading deregulation, the gold-jewelry market
is also opening up. Taxes are falling from 23% to 20% to
meet WTO commitments, bringing prices closer to those in
Hong Kong, where mainlanders snap up tax-free gold. WTO
rules have thrown jewelry production, manufacture and
retailing open to foreigners too, presaging slicker
marketing and keener prices.
Gold-jewelry and
trading reforms come just as rising inflation gnaws at
precious savings, encouraging people to spend, and as
rural incomes march north after years of stagnation on
higher crop prices, back-wages payment and reduced
farming taxes. One sign of rural good times is that
Guangdong's peanuts-paying sweatshops find themselves
short of 2 million workers.
Those
good times may not last much
past 2006, when China must cut farming subsidies and remove
barriers to imports. If only a few of the 800
million to 900 million rural Chinese, who like many
rural Asians covet gold for status and as ready cash at
the gambling table or when disaster strikes, buy gold
while they can, sales on the exchange and in emporiums
will rise.
By some measures
the Chinese are short of gold - or
uninterested. Analysts calculate about 5,000 tons hang around necks,
adorn fingers and sit on mantelpieces in China, a low four grams
a head. Annual consumption is 0.25 gram per
person, against 0.75 gram in Taiwan, one gram in India and 2.75 grams
in Singapore. Even the People's Bank of China - the
central bank - appears light, holding gold equivalent to 2%
of its assets, reckon pundits, compared with the European
Central Bank's 15%.
"Consumption may be of
the order of 250 tons a year and may have the potential
to rise to 600, of which perhaps over half would need to
be imported," wrote research house GFMS in a World
Gold Council report. A similar market transformation
occurred in poorer India in the early 1990s. Demand tripled
to 600 tons annually. "India's population is similar,
in size at least, to that of China, but its per capita
GDP at $2,540 is only 60% of China's $4,450 in 2002 on
a purchasing power parity (PPP) basis, implying that
China should take even more gold," wrote GFMS.
But
raw comparisons are folly. "The whole culture and ethos
of gold in India seems so utterly different from that of
China that any such gross comparison must be
misleading," noted GFMS. China's gold appetite could
still potentially match India's. "Just imagine, the
Shanghai Gold Exchange can let the man on the street
trade gold. If every other Chinese citizen bought one
gram of gold, the demand would increase to 500 or 600
tons, just like India. We expect this to happen within
three to five years," said Yang.
But gold faces
a tough battle compared to India for consumers' hearts
in the People's Republic of Consumerism. "I doubt the
market will triple as has been forecast. This is because
platinum jewelry will continue to be more fashionable
and preferred, as will other consumer items. I doubt that
gold will get much of the investment market - for a
start it is priced in dollars, so any revaluation of the
yuan will reduce its investment return," said Matthew
Turner, Virtual Metals gold economist.
Even if China's
share of global demand rises from about 7% now to
the 15-25% typical for most base metals and platinum,
gold's value will not leap, simply because rising prices
will draw more out of the ground and from around
people's necks. Output from China's unsophisticated gold
mines already roughly equals demand.
"As with
all commodities, there is supply from mines, which tends
to rise at about 1% a year. But gold is different from
most commodities in that it doesn't get used up, so
almost all the gold mined is still around somewhere.
Changes in this are all sources of supply too," said
Turner.
That the market is opening suggests
the authorities expect no upsets. "The Chinese
authorities must be relaxed about the repercussions of
liberalizing the market or they wouldn't have done it. This
suggests we aren't going to see any fireworks in demand,"
said Turner. Allowing individual gold trading is one
aspect of precious-metal trading reform in which the state is
withdrawing from the market, albeit slowly, shedding its
trader's jacket and stepping into regulator's shoes.
SGE's birth is itself part of this process.
Since opening in 2002, gold trading on the SGE
has risen to about a ton daily. Platinum trading,
starting in August 2003, totaled 17 tons in the 12
months since. Expecting membership to hit 500, from the
current 128 within five years, SGE is building its own
premises on a prime Guangdong Road plot.
Next
year, the exchange hopes to trade silver, subject to
elimination of value-added tax. It is also lobbying for
more agents to import and export gold and platinum. Only
China's big four banks, SGE and the People's Bank, can
move the yellow metal across the border, while only
China Platinum Corp holds rights to the latter.
"I think it's quite inefficient. SGE has made
many reports to the People's Bank of China arguing for
more banks and exchange members to import and export
gold, similar to other markets. But the People's Bank
remains quite conservative. It will be a gradual opening
up," said Yang.
There are signs of change. Seven
jewelers were awarded rights last year to import
jewelry. Trading gold physically will remain the
province of brokers for the time being. SGE may later
offer such services for individuals. Futures, platinum
deregulation and foreign ownership of SGE seats are
among reform candidates tipped for inclusion in the
National Development and Reform Commission's five-year
plan implementing in 2006. Exchanges are already
tussling over futures.
"Shanghai Futures
Exchange will probably end up trading the gold futures
contract. However, I hope that is not the case as it
would significantly increase SGE's volume," said Yang.
Such barriers plus the unconvertible yuan and
restrictions only permitting gold's trans-border
shipment as bars keep foreign players sidelined. One
reason for keeping a tight check on gold is preventing
it from becoming some form of a yuan proxy.
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