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China Business Weekly

China's growing gold stockpile

The news that a Chinese company is to buy the largest commercial gold vault in the world (inthe Chase Manhattan Plaza in New York) is yet another reflection of China's enthusiasm for stockpiling gold. Although China only infrequently releases official figures on this matter,the World Gold Council estimates China will import over 1000 tonnes of gold this year, overtaking India as the biggest buyer in the world. But whereas India is trying to reduce its gold imports through the imposition of taxes and import restrictions, China takes the opposite view and is encouraging the acquisition of gold by all sectors.

China's gold policy goes back to the five-year economic plan in 2000, which talked of establishing an open gold market.

In 2002 the Shanghai Gold Exchange (SGE) was launched and within 10 years it had become the biggest physical gold exchange in the world. In the year to the end of June 2013 contracts for delivery of gold to the SGE were thoughtto exceed1000 tonnes, or 40 percent of total global production.

In another important development, in 2010 banks were instructed to actively help develop China's national gold market. This includedoffering finance for the purchase of overseas gold mines, supportingindividuals to trade gold on the SGE, and sellingtheir own branded gold bars.Altogether commercial banks are active in the gold market in four areas: physical gold, gold for trading, gold for financing, and gold for wealth management.

Most recently, China's central bank last month produced a new draft policy to increase the number of firms allowed to import and export gold, while easing restrictions on individual buyers of the precious metal.

So why is China actively encouraging its citizens to buy gold when other countries such as India are trying to dissuade them?

Undoubtedly one reason is that China wishes to diversify its US dollar assets and purchasing physical gold is one means of doing this. The recent budget crisis in America added impetus to this trend as it caused much concern in China; most dramatically,the Xinhua news agency called for a "de-Americanised world".

Buying gold also supports the gradual internationalization of the yuan. According to Britain's Daily TelegraphChina wants its currency to replace the dollar in global commodities trading and a growing number of people are seeing China's gold moves as a means to promote the yuanas the world's reserve currency. While there is no chance that China will adopt a gold standard, in which its currency is fully backed by gold - there is not enough physical gold in the world for this - large reserves of physical gold backing the yuan would certainly bolster market confidence.

Asian emerging countries, including China and India, consume about 70 percent of total global gold imports; within Southeast Asiademand is particularly strong in Thailand, Indonesia and Vietnam.This enthusiasm goes against global trends where gold is definitely out of favour and prices are close to a three-year low. Of course, if China succeeds in dominating global commodities tradeby using the yuan, its influence on market pricing for gold will also grow. It will certainly be interesting to see what happens.

For more columns in this series please see www.bangkokbank.com


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