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Gold Rush in China

Though it was just 5 a.m., long queues of people holding special reservations waited patiently in the darkness to enter the Beijing Caishikou Department Store, where 3,000 kilograms (kg) of gold bars minted by the China Gold Coin Incorporation to commemorate the upcoming Year of the Pig were going on sale for the first time.

Twelve hours later, the department store had sold 50 million yuan (US$6.4 million) worth of the hotly pursued gold bars for a retail price of 218 yuan (US$27.90) per gram, 40 yuan (US$5.10) more per gram than a year ago.

Again a hot commodity, gold has long symbolized wealth and good fortune in the hearts and minds of the Chinese people.

To avoid a stampede for the precious metal, Beijing Caishikou pre-arranged its gold sale via a telephone hotline. Still, many people without reservations queued up in the hope that a reservation might go unfulfilled, allowing them to make a purchase. Wang Chunli, the store’s general manager, said demand exceeded supply by a huge margin.

Aside from traditional influences, the latest rush to gold has been fuelled by a combination of factors, including the depreciation of the US dollar and a surge in prices of a wide range of commodities, including “black gold,” oil. Not surprisingly, China’s 300 or so gold producers are smiling all the way to the bank.

The producers’ combined profits for the first half of 2006 jumped 53.21 percent from a year earlier to more than 2.47 billion yuan (US$316 million). China’s gold production during those six months increased by 7 percent from a year earlier to 106.7 tons, while demand is expected to increase to 288 tons in 2006.

The strong demand for the yellow metal has not gone unnoticed by the nation’s banks and other financial institutions, which are gearing up to cash in on the boom.

China Merchants Bank, for instance, has applied to the China Banking Regulatory Commission for permission to provide an online gold trading service and to allow customers to use the gold they own as collateral to secure loans.

A recent questionnaire by the Beijing Gold Economic Development Research Centre in 10 major Chinese cities indicated that 70 percent of respondents said they would invest in gold if they had the money, and that more than 20 percent of securities investors would transfer part of their capital to gold to balance risks found in Chinese mainland stock and securities markets.

In a move to attract small private investors, China on December 26 lowered the trading threshold at the Shanghai Gold Exchange (SGE) from one kilogram to 100 grams; the latter debuted at an opening price of 160 yuan (UA$20.50) per gram, with spot trading opening at 157 yuan per gram and remaining flat for the entire trading session, closing at 157 yuan per gram, a drop of three yuan. During the trading, only 0.4 kg or four gold bars of this type changed hands, and transactions amounted to only 62,800 yuan (about US$8,042).

In other gold-related happenings, China will fully but gradually open its gold market to foreign investors. 

The country will promote gold futures trading and will encourage foreign investors to invest in the domestic gold mining industry, according to Chairman Cheng Fumin of the China Gold Association. Spot trading is predominant in China now. He said authorities are considering measures to tighten market supervision and to improve the sector’s business environment.

China, the world’s fourth-greatest gold producer, will raise the threshold for foreign investors, seeking quality and quantity, in the gold mining sector to improve the sustainability of the industry, according to a source from the National Development and Reform Commission (NDRC).

China has more than 1,200 gold mines, of which 739 or 61 percent are small mines with a daily ore output of less than 50 tons. This segment of the industry is marked by low efficiency and high risk, he said. China will encourage foreign firms to invest in the sector and local companies will be encouraged to take advantage of their advanced technologies and management expertise via mergers and acquisitions.

The Chinese Government has maintained a tight hold on the production and distribution of gold. The new trend, Cheng said, involves breaking the State monopoly in the sector and allowing enterprises to participate in the market. China also plans to build large gold production bases and to increase its gold output, while suppressing illegal mining.