Lifting the gold bar in China
By David Fullbrook
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.
(Copyright 2004 Asia Times Online Ltd. All rights reserved. Please contact content@atimes.com for information on our sales and syndication policies.)
atimes.com |
