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Mark O'Neill

Chinese take fresh shine to the metal as dollar falls and interest rates remain low

Chinese are rushing to buy gold as a hedge against the weakening US dollar and negative real interest rates.

The gold fever has prompted a booming trade not only in bars, coins and jewellery but also 'paper gold', in which the investor does not take possession of  the metal, but trades it  like other financial instruments.

Figures from the China Gold Society show trading on the Shanghai Gold Exchange  in the first 10 months of the year reached 515,447.1 kg, a rise of 45.35 per cent over the same period last year.

Shanghai buyers snapped up all commemorative gold coins to mark the year of the chicken as soon as they came on the market  last month.

The price of gold  reached more than US$450 per ounce this month, its highest level in 16 years and up from US$254 in 2001.

Gold has for centuries been a favourite of Chinese, who wanted a stable investment while their currencies devalued and their governments fell.

When it took power in 1949, the communist government made gold a state monopoly and kept it that way for 50 years.

It has allowed a gradual liberalisation of the market only since 2002, with the establishment of the  Shanghai Gold Exchange and trading and private ownership of gold.

For the first time since 1949, individuals can trade gold through state-owned banks.

Bank of China and other financial institutions offer investment schemes that allow individuals to trade the metal over the phone and the internet.

Such growing interest in the metal could lead the government to further liberalise trading.

'The weakness of the US dollar is the main reason for the rise in gold,' said Xu Ming, a gold specialist with the Bank of China.

'A weak dollar is the long-term policy choice of the US government and governments are in the process of reducing their dollar assets. The European Central Bank will not intervene in the market. All this is putting pressure on the dollar.'

Gold is one of a limited number of investment options for Chinese, who hold more than one trillion yuan in simple bank deposits.

This year thousands have reduced or closed their US dollar  savings accounts in favour of  yuan-denominated accounts because they expect a revaluation of their currency.

The trading of  paper gold is officially available only to residents of Shanghai with a current account in the Bank of China, which started offering the service in November last year.

They can trade by telephone or  online during trading hours of the Shanghai Gold Exchange.

Lai Bo, a salesman with CGS Limited in Chengdu, capital of Sichuan province, said that his firm had sold one tonne of gold to individual investors since it opened its office there.

'Chinese buy when prices are rising and sell when they are falling. Gold prices have been rising this year. In addition, real interest rates are negative, even after the central bank's  recent  increase. Our advice to people is to put a third of their savings into something stable, like gold,' he said.

Mr Lai said that his company was helping Shenzhen in an application to the central bank to open a gold exchange.

'It applied in February but the government is unlikely to agree. Shenzhen is a better location than Shanghai, because nearly 90 per cent of China's gold processors are nearby,' he said.

CGS, a joint venture between mainland and Hong Kong bullion traders,  brought CGS Standard Gold Bars, with a purity of 99.99 per cent,  to the market in July, with the price based on the daily gold price on the London Precious Metals Exchange.

China Merchants Bank, which acts as the agent for the bars, said that its Beijing branch sold 180  kg of  the bars  from July 12 to November 15 but repurchased only 15 kg, because investors wanted to keep them, in anticipation of higher prices.

The bank has applied to the China Banking Regulatory Commission for permission to provide an online gold trading service to customers and allow them to use the gold they own as collateral to secure loans.

Wu Hongyue, director of sales for CGS in Shanghai, said that China was rapidly becoming a country of individual gold investors. 'As the financial reforms progress, so the gold market is moving from one that was tightly controlled to one that is being gradually liberalised. I am very bullish on the individual market.'

The rise in prices has been a bonanza for China's gold producers, whose combined profits in the first nine months rose 35 per cent from a year earlier to more than two billion yuan.

In the first 10 months, production was 132.3 tonnes, an increase of 2.87 per cent over the same   period last year.

China is the world's fourth-largest producer but output of about 300 tonnes is only a third of demand.



New gold rush hits mainland