ultrachina.com
An $80 Billion Market—Attractive to Both Domestic and Foreign Gold Dealers
UltraChina.com (03/02/2001)
An $80 Billion Market—Attractive to Both Domestic and Foreign Gold Dealers
Compared with the "Gold Bar Fever" and "Gold Brick Fever", which were prevailing in Beijing and Shanghai during the Spring Festival last year, the domestic gold market this spring is much more slack. However, one message coming out immediately after the holiday season was much acclaimed by persons within the industry. On Jan. 31, Hong Kong Hengfeng Gold Technology Co. Ltd. announced the cooperation with China National Gold Corporation that is enjoying a monopolistic position in the mainland. After the news, persons within the industry exclaimed that the old half-century-long system that gold products are under the proprietary administration of the central government is about to be breached a gap in the field of retail, the next step of which will be comprehensive opening of gold market.
Opening up of gold industry: the first step
According to informed sources, the first target for Hengfeng Gold Co. Ltd was the Northeast and North gold markets which were centered around Beijing. It will cooperate with China National Gold Corporation in developing a 180-mu comprehensive cultural entertainment center situated in Yanjiao Development Area which lies east to Beijing, and join in the production, wholesale, and retail of gold products.
Mr. Lin Shirong, Chairman of Hengfeng Gold Co. Ltd claimed here that under the favorable situation that China will enter the WTO, both sides will actively invest in and develop gold processing industry as Hengfeng Gold Co. Ltd has rich experience and proprietary technology, while China National Gold Corporation has extensive business relations both at home and abroad.
China National Gold Corporation was founded in 1979, which now has 9 subsidiary provincial gold companies and over 70 entities in which it has sole investment, holding shares or stock equities. Being the only one experimental unit approved by the State Department to deal in gold-leasing business, it has an annual production capacity of 125,000 Kilo Gram, accounting for over 10% of total national output. According to Mr. Xu Wenan, deputy General Manager, the cooperation between the two sides can enhance scientific innovation of gold products in the mainland, increase sales of gold accessories, and meanwhile facilitate transformation of business management.
Market analysts say that although Hong Kong capital has been participating in mainland gold business in various forms, this is the first time that business is conducted in such large-scale and at such high standard.
Inside story for opening up: aggregate flaws of the old system
Gold has been a special commodity exclusively controlled by the state, and its purchase and distribution administered by the People’s Bank. Any other enterprises were not allowed to engage in the business. Persons within the industry point out that with China being admitted into the WTO and the quickening steps of economic globalization, the reform of capital market, foreign exchange market, and silver spot transactions is gradually perfected, which weakened its financial property but enabled its commercial quality to stand out. This is the reason for opening up the gold market.
But, according to informed sources, there are deeper causes as far as China’s existing situations are concerned.
First, the imbalance between supply and demand has led to a rampant black market. Under the rule of strict management of production and distribution, there existed an imbalance between supply and demand because the rule prohibits the existence of gold market, the number of enterprises and their business activities were strictly limited. Although the central bank has made great efforts to correct the flaw, the government, as the only supplier of gold products, cannot master and deal with such large amount of market information on time, thus unable to adjust to market fluctuations flexibly. As a result, voluminous black market seemed to be a logic outcome. Moreover, the central government was helpless against it and local governments somehow adopted a policy of connivance, leading to rampant violations of the law.
Second, rigid price policies that cannot reflect market supply and demand and resulted in grave smuggling activities. This rigid price policy caused a difference between domestic and foreign gold markets, which cannot but solicit smuggling activities. Meanwhile, it added business risk to the central bank, causing heavy losses to the country. Statistics show that there were RMB1.7 billion that flowed into the pockets of smugglers in 1997 alone.
Third, Low efficiency in distribution of resources distorted production. Because gold was purchased unconditionally with a protective price, gold enterprises, more often than not, would plunge into a battle for resources rather than competition in terms of production technology, and management level. Consequently, business structure was unsound, and the problem of extensive development was more and more prominent. On the other hand, the traditional system of purchase and sales also twisted the activities of business management. Gold enterprise were used to delivering products to the central bank instead of consumers, therefore having no capabilities for market operation.
Finally, negative impact on financial market reform and improvement of financial administration has been great. After 20 years of reform and open door policy, great progress has been achieved in setup and opening of financial market. Apart from stock and money markets, bond and foreign exchange markets have also undergone great development. Gold market is the only exception which is still under strict government control. Because such a system is considerably limited, while underground market is getting out of control, consequently it began to affect negative influence on the comprehensive development of financial reform.
Market operation: three steps for opening up.
China is the third largest gold consuming power in the world, whose annual sales volume amounts to RMB80 billion and is increasing 10% every year. Gold consumption has much to be cultivated. One survey showed that average possession of Shanghai people is only 0.8 grams, while that of Hong Kong people is as high as 8 grams per person. With gradual opening of gold market, private demand will produce a great increase.
Mr. Liu Shanen, deputy director of Beijing Research Center for the Development of Gold Industry, said after opening the market, gold as a commodity will be more widely accepted by consumers in more forms. Domestic and foreign enterprises and investors can also enter the business closed before, and gold as a means of investment will be more extensively employed by ordinary Chinese.
According to information from Gold Administration Bureau, the actual implementation of market reform of gold industry will be divided into two stages: 1. adjustment and transition; 2. market opening.
Adjustment and transition will be in the year 2001 and 2002, which will focus on adjusting and putting into order various gold policies, and facilitating the formation of market frame of gold products. Its aim is to realize controlled opening of the market and smooth transition of management system. During this stage, reform will be adopted in two steps:
The first step is to take roughly a year to make various policies and rules concerning market opening, including establishing a gold exchange (The first gold exchange in China will be built in Shanghai in the first half next year.)
The second step is to annul the policy of "uniform purchase and distribution", put into operation the gold exchange, thus integrating gold transactions into a normative system on a nationwide scale and achieving a basic realization of controlled gold market opening.
The second stage aims at comprehensive opening of the market under condition that controlled administration has been achieved and transactions, operation and supervision have been gradually standardized. Its complementary measures are as follows: free trade of gold; permission of buying and selling of gold bars, gold financing, saving, debit and credit on gold conducted by domestic and foreign commercial banks; proper gold time-bargain business by the gold exchange.
However, some financial experts pointed out that this stage may take considerably long time because China has yet realized market economy, the supervisory authorities are very much lacking in supervising ability and experience, and free conversion of RMB is yet to come.
Gold industry: remodeling a "gold body"
Compared with foreign corporations equipped with gigantic amount of capital and advanced technology, mainland enterprises are situated in a quite embarrassing place. According to sources at Beijing Research Center for the Development of Gold Industry, some key gold-producing regions and old enterprises have lost their resource advantage, while new ones are facing ever-diminishing resources; whether old or new enterprises, their resource quality is deteriorating. Mr. Wang Dexue, director of the Gold Administration Bureau of the State Economic and Trade Commission anxiously pointed out domestic enterprises, if not adopting substantial reform, will be eliminated without exception in the international competition.
Statistics indicate that there are more than 1200 gold enterprises in China. By the beginning of last year, 13 of them have had over one million RMB deficit. After a year’s renovation, the number of losing-money enterprises decreased by 10%, their volume of loss diminished by 50%. But generally speaking, gold industry has been displaying syndromes of quality deterioration, efficiency decline and business recession.
Another dilemma facing domestic enterprises is "resource problem". A noted gold expert, Mr. Tu Huaikui, thinks that the central government, in view of lack of gold resources in the east and middle region, has put forward the strategy of "Developing the West", which will encounter much difficulty in gold mining. Data show that there are relatively fewer gold mines in the west, whose gold mine deposits account for 11% of the total in China, and proven gold reserves occupy 5% of the total national reserves. Moreover, most of the gold mines in the west are of low-tenor, and in some of those regions, the percentage could be as high as 40%.
It is known that the Chinese government will beef up the reform of large- or medium-sized state-owned gold enterprises. To achieve a satisfactory result, the relationship of property rights must be sorted out as soon as possible; the main body of running state-owned assets should be set up; reform the system of investment and financing; open up channels for fund-raising; and encourage enterprises to go on listing. Only by taking these steps, can Chinese gold-producing enterprises become more competitive in the international market.
By Zhang Ke |
