China May Expand Its Gold Market

May 9th, 2016 by

china-flag-shanghaiOne of the knocks against the otherwise exciting introduction of the Shanghai Gold Fix and the relatively new Shanghai Gold Exchange (SGE) has been that strict rules governing the Chinese gold market prevent it from truly penetrating the global gold trade. In response to this roadblock, China is now moving to simplify the rules for approving imports and exports of the yellow metal.

The new process making it easier to send gold in and out of the country are expected to be tested on a preliminary basis beginning in June.

China’s Emerging Gold Market

This new development has been more than a decade in the making. In the middle of the last decade, China began to loosen the rules on gold ownership within the country after enjoying consistent, explosive economic growth from 1990 onward. As China’s traditional hunger for gold was gradually unleashed, the country became one of the world’s top consumers of the metal.

Next, the Chinese sought to mine more of the metal themselves. While China is known for its rich deposits of natural resources, especially rare earth metals and other minerals used in modern technologies, its desire for gold production expanded far beyond the country’s own borders. Chinese firms began to purchase major gold mining projects overseas in order to rapidly boost output. Consequently, it has grown into the top global producer of gold, as well.

Taking Greater Control

china-goldThese two major shifts in China’s gold market led to the opening of the Shanghai Gold Exchange as a bona fide gold trading platform late in 2014. (The SGE organization has actually been in existence since 2002 and open to foreign banks since 2007.) Although this brought together quite a bit of the gold trade that flows through Southeast Asia (Singapore, Thailand, etc.), it was still somewhat limited in its scope. Most analysts used data from the SGE as a gauge of trade volume in Greater China and Asia specifically, not the international trade generally. Plenty of gold bars from London entered the SGE (and were summarily melted down), but impediments to exporting the metal out of China hampered the exchange’s global significance.

Similar limitations have been noted with this year’s new Shanghai Gold Fix. This price-setting benchmark is administered by banks from around China and is denominated in the local currency, the yuan (also known as renminbi). However, it is seen more as a regional locus of price discovery that has a limited impact on global gold prices.

Simplifying the Rules

china-jewelryThese two gold market mechanisms should get a boost if Chinese authorities do indeed ease restrictions on import and exports of gold. In a joint statement given by the People’s Bank of China (PBOC) and the General Administration of Customs, the simpler process will be given a test run in major cities including Beijing, Shanghai, Guangzhou, Nanjing, Qingdao, and Shenzhen.

Before, companies had to apply for a new permit each and every time they imported or exported the metal, making the process cumbersome for frequent and large-volume deals. The new rules will allow these firms to complete up to 12 transactions (where import or export) with a single permit. This not only opens up operations for gold traders but surely makes life easier on the regulators and bureaucrats issuing the permits.

This move by the Chinese government fits in with Shanghai Gold Exchange and Shanghai Gold Fix becoming more international institutions rather than simply local or regional mechanisms.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.