For thousands of years, Gold and Silver have been revered in China. China's economy is accelerating and Chinese Citizens and Investors are only just starting to hoard gold as a store of wealth.
Over the last decade Chinese Citizens have been using property as a store of wealth. Now with heavy govt restrictions on property purchases, eg 50% deposit required on a 2nd property and over 75% deposit required on 3rd property purchase. There is a fundamental shift in the store of wealth in China to gold to compensate for the property restrictions.
Demand for the yellow metal is set to break new highs in the coming 12 months.
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Hong Hong, as an established gold trading center, will not deter Shanghai's appetite to become another capital for the region. Wu Yiyao reports.
Hong Kong has enjoyed the undisputed status for many years as the gold trading capital of the Asia Pacific region. Many fortunes were made and lost in the ancient hall of the Chinese Gold and Silver Exchange, where multi-million dollar deals are sealed with hand-signs in preference to written contracts, and the units of trade are denominated in the ancient tael, instead of the troy ounce, which is the international standard.
To consolidate its dominance in gold trading, Hong Kong has created a modern exchange in more recent years to trade gold futures contracts in compliance with the practices and rules of other global markets. But the efforts apparently have failed to deter Shanghai from making a serious challenge to Hong Kong's dominance in the mainland city's drive to assume what it considers its rightful place as a global financial center.
In Shanghai, the authorities, traders and investors work together to create a more active gold trading market, at a time when more and more nervous investors around the world are betting in gold to hedge against global economic uncertainties.
For instance, the Shanghai Gold Exchange (SGE) commenced trial operation of an inter-bank market on December 3, hoping to generate a constant flow of liquidity into China's gold market.
The kerb market will boost gold trading and enable China to have a bigger say in the pricing system of the global gold market, according to Li Ning, an analyst with Shanghai CIFCO futures.
As many as 20 banks have been approved to join the trial operation of the inter-bank market, including ICBC, China Construction Bank, Bank of China, Bank of Communication, HSBC (China) and Standard Chartered (China), the announcement said. A mutual commission of 0.04 percent will be charged for each transaction.
Institutions approved by SGE may trade via a bilateral, over-the-counter system of the China Foreign Exchange Trading System & the National Interbank Funding Center. Transactions and clearing will be done through SGE, the exchange said.
The introduction of OTC (over-the-counter) gold inter-bank trading will enable gold investors to choose from wide varieties, and enable a more important role as part of the market mechanism, according to SGE.
The inter-bank market will enable significantly more trading of gold in the future, said Chen Xin, trader with Shanghai Pudong Developement Bank, which is also among the 20 approved banks to operate in the inter-bank market by SGE.
If exchanges within the SGE are classified as "retail", then the inter-bank market will become "wholesale", said Chen.
Trading of gold at SGE measures no less than 100 kilograms under the current matching system; The inter-bank market will allow a bank to buy and sell gold measuring above a tonne under the market maker system, said Chen.
The inter-bank market may open only to member institutions of SGE, but in the future, it will open to a wider community, according to Jiang Qi, gold analyst with SPDB.
In early November, SGE said it will launch OTC trading, gold ETFs, Friday night trading and improve the leasing market.
China is to open its domestic market for precious metals to the international community, as Shanghai looks to gold exchange-traded funds in a maturing market, said officials attending a conference on gold in Hong Kong.
An inter-bank market will also be launched starting with spot contracts and gradually offer forward contracts, according to Wang Zhe, head of Shanghai Gold Exchange.
In the future, all banks trading on the China Foreign Exchange Trading System and National International Funding Center, including foreign banks, will be able to trade in the market, according to Wang.
Pilot exercises in the interbank market will be conducted with Chinese banks and will gradually open to all, according to Wang.
Analysts said the interbank market will enable more cooperation between the Shanghai Gold Exchange and commercial banks as well as other financial institutions and make investments in gold more convenient in China.
China will open up to the global gold market, increasing its impact and attracting more foreign banks to get involved in China's domestic market, said Xie Duo, head of the financial market department of the People's Bank of China.
Xu Wenjun, deputy head of Shanghai Gold and Jewelry Trade Association, also said he expected a surge in jewelry demand during the rest of this year and that start of next, as the Christmas and New Year holidays approach.
But he expected a shift in the way Chinese consumers buy gold products.
"Consumers now attach more importance to design when buying gold jewelry than ever before, but they are aware of prices as usual," said Xu.
In China, demand for gold fell 8 percent to 176.8 tonnes in the third quarter of 2012 from 191.2 tonnes in the third quarter of 2011 due to falls in jewelry of 6 percent and investment of 12 percent, mainly as a result of negative sentiment surrounding China's slowing economy, according to statistics of the World Gold Council.
Jewelry demand was 123.8 tonnes in the third quarter, 2012, due to a decline in purchases of 18k pieces and a notable slowdown in the expansion of the retail network, as the building of stocks was cut back. Investment demand was down to 53.0 tonne. Demand this quarter remains 19 percent above the longer term average.
Yan Fang, a sales consultant at a gold store in Shanghai's Yu Garden - one of the city's gold jewelry hubs, has also seen changes in buying habits, as consumers tend to buy gold jewelry in batches as investments.
"Fewer individuals are buying gold jewelry for themselves or as gifts this year. However, we have frequently seen big orders, such as 500,000 yuan ($79,000) worth of gold rings being bought in a single purchase."
Investment managers said they had seen more demand for gold bars and commemorative coins than for gold-backed exchange-traded products.
"An increasing number of investors realize that buying gold may add stability to their investment portfolios and they are seeking long-term yield, rather than short-term profit," said Li Xiaodong, a wealth manager with China Construction Bank Corp.
A recent report by the World Gold Council said global investment in ETFs over the quarter was up significantly by 56 percent on the previous year.
Central banks bought 97.6 tonnes during the quarter. In six out of the last seven quarters, central bank demand has been around 100 tonnes, which is a sharp increase from as recently as 2010. The year to date figure for central bank buying is up 9 percent.
"Gold is beginning to re-establish itself as part of the fabric of the financial system. In the medium term, the quantitative easing initiatives in the West and the continuing growth in the East, particularly in India and China, coupled with the seasonally strong quarter coming up in Asia, are excellent indicators for further growth in the gold market," said Marcus Grubb, managing director of investment at the World Gold Council.
"Against a backdrop of continued global economic uncertainty and elections in China and the US, it is clear from five year rising demand trends, that gold's fundamental property as a vehicle for capital preservation continues to endure, as evidenced by this quarter's increase in global ETF investment, up 56 percent and continued purchasing by central banks, the ultimate long term investors," said Grubb.
