From the inception of New China, i. e. the People’s Republic of China, and some years before the emergence of the Shanghai Gold Exchange this country practiced a strict system of state control and regulation over transactions involving gold. Since 1982, China liberalized the market of gold products and by 1992 the state was pursuing a policy of floating prices for the yellow metal according to which gold prices in the home market were corrected for a certain period under the influence of changes in the international market of gold.
After the official inauguration of the Shanghai Gold Exchange on October 30, 2002 China put an end to the planned system of purchasing and distributing gold which was in force for several decades, thus giving a start to a new stage of transition from the plan-based system to a market way of managing gold transactions.
After 8 years of operations at the Shanghai Gold Exchange and by gradually withdrawing from planned purchases of gold and simultaneously making gold transactions open for the private sector, China began to deepen the reforms in the gold industry in a gradual way to achieve "synchronization" of the internal and international markets. And at last it happened: on August 3, 2010 the National Bank of China released the “Proposals to Stimulate the Development of the Gold Market” which openly expressed China’s intentions to remove or soften the restrictions regarding gold transactions. Many authoritative Chinese and foreign editions are writing about it vying with each other.
The online media portal http://www.24k99.com/, covering local and international markets of precious metals, says: “The “Proposals to Stimulate the Development of the Gold Market” state that the number of commercial banks having the right to carry out gold export-import operations will increase according with the requirements of the market. The state will encourage and direct commercial banks to run operations involving gold-based derivatives nominated in Chinese yuans.” The statement of the Central Bank of China also says that banks will be allowed to hedge their foreign positions in gold to stimulate trade in yuan derivatives.
Another Chinese edition, the Financial News, quoted the statement made by Jiang Shu, senior analyst of Industrial Bank: “The Proposals have formulated a project for developing the internal Chinese market of gold for the next ten years not only from a strategic position, but also from the point of view of concrete actions for its realization.” The most significant points outlined in the Proposals are:
1) Measures are to be taken for prompt development and introduction of a legislation regulating the gold market; “Gold Market Regulations” are to be approved; gold and gold products export and import instructions are to be developed and become effective; regulation of financial institutions in the field of gold transactions is to be reinforced.
2) Gold is relieved of VAT: the favorable fiscal policy pursued by the Shanghai Gold Exchange and Shanghai Futures Exchange will not so far bear be changed. It means that the 17% value-added tax imposed on gold will be completely reimbursed for gold transacted at these exchanges. However, one question remains: if the tax is all the same returned in its full amount, why not cancel it entirely? In the course of 14 years gold in China was really ranked among goods which are not subject to VAT. With the advent of the Shanghai Stock Exchange and Shanghai Gold Exchange, which were to organize the circulation of gold and other precious metals and suppress fraudulent operations involving them, the tax policy has changed. According to the statutory acts issued by the Main Fiscal Administration of the People’s Republic of China, the 17% levied on gold as VAT will be reimbursed to the participants of the Shanghai Stock Exchange and Shanghai Gold Exchange after a transaction is completed and on the basis of documents written out by the exchanges. It means that gold actually is left without VAT, but only for those who play by the rules. Analyst Jiang Shu believes that the policy permitting to reimburse the 17-percent VAT for gold is a big advantage reflecting state support in this field. Besides, the exchanges will study the possibility of improving the tax mode for gold investment products and for transactions involving gold at commercial banks.
3) The Chinese authorities will continue to make gold trade more open for foreign companies and will increase the number of foreign members at the Shanghai Gold Exchange. China is the largest producer of gold. During the last 20 years the People’s Republic of China supplied the whole world with its goods and now it seems that Chinese gold is the next thing in turn.
As a result of the overall changes the gold market in China will become more open and attractive to the international community. The processes of reforming the gold market in China are in many ways concordant with the formation of a new protectionist policy in the field of mining, production and internal circulation of gold and its export pursued in Russia. For Russian commercial banks the prospects of such reforms are defined first of all by expanding opportunities to organize and develop new areas of activity within the domestic financial system for banking business involving gold as a financial instrument, says I. Shishkin in his article “About the state regulation of gold transactions” posted on Gold Mining News.
And still China goes its own way which has one essential difference from the Russian reality: already now the huge savings accumulated by the Chinese middle class are flowing thick and fast from real estate investments to gold investments instead. To witness this tendency, it would be enough to visit some of the Chinese jewelry exhibitions and see with your own eyes piles of gold ingots showcased by many high-profile jewelry companies and a whirl of visitors flocking around to find out prices.
You may buy an ingot even staying at home and using an e-commerce service to deliver it. Moreover, “the use of online platforms for investment transactions involving gold becomes a new mainstream in the Chinese gold market.” According to Wang Shengbin, Vice President of the Chinese Gold Association, “in China there are already several dozens of companies working in field of gold investments which have their own platforms for online operations,” as gold.org.cn, the official industry agency, reported.
The Financial Times says that Chinese investors bought 73 tons of gold last year, up from 18 the year before. That's a 315% increase in demand from Chinese retail investors, which is quite impressive. According to analysts, IBT Commodities says, what's happening in China right now is that a lot of wealth is being switched out of the property markets into the gold market. In recent years real estate prices in big cities were rocketing reaching a point where they matched prices in many megalopolises around the world. Property investors have earned a lot of money on this hike and now they are concerned with the government’s policy to cool that market and avoid another price bubble. In this context gold turned into the most sought-after and reliable investment product for general consuming public and this may push its price further up.
Till now India boasted of its unchallenged gold power with the farmers and most of the 1 billion people buying the yellow metal on any religious or special occasions. Watching this unmatched gold power of India was China, which till recently did not encourage the easy buying of gold in its markets. However, with gold prices soaring to new heights and the power of gold rising in the market following the economic slowdown, China has been rethinking on its gold policy. The results have started coming from the Dragon land.
The gradual liberalization of capital rules in China regulating transactions dealing with capital and financial derivatives as well as foreign exchange control have unpredictable consequences. China is the world's largest producer of gold and the second largest consumer, behind India. But please keep in mind the following factors:
1) According to various estimates, India’s per-capita GDP in 2009 was about $1000, whereas in China it reached $3600, or threefold. Certainly, the per-capita GDP cannot be considered an authentic indicator of well-being of the population, but it may well give you a general idea.
2) In 2008, China's savings rate-to-GDP ratio was nearly 52%, according to People's Bank Monetary Policy Committee Member Fan Gang. According to the World Bank, in the early 2000s India’s savings rate-to-GDP hardly reached 25% and was lower than those scored by the five Asian players – China, Malaysia, South Korea, Thailand and Indonesia – in the 1980s. Some of the Indian analysts issue optimistic forecasts saying India’s current savings indicator is already 38% and will be 45% by 2030.
Even if this scenario will be realized, India will not be able to compete with China in the gold race if the latter’s government will continue to liberalize its gold market and the population will get used to save money in gold and its different ramifications. After all, yellow in China is the color of happiness and well-being.
Olga Patseva, Editor of the Rough&Polished Asian Bureau in Shanghai
