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China's gold prices have been holding at their high end since last year, driven by rises in international gold prices, growing domestic demand and the uncertainty in the global political and economic fields.

Graphics by LI BAICAI/China Business Weekly

Gold prices in China have climbed by a record 32 per cent since the Shanghai Gold Exchange (SGE) started operation on October 30, 2002, which kicked off free trading in gold for the first time in the history of the People's Republic of China.

By the end of last Friday, the price of Au99.95 gold for the manufacturing of ornaments, had shot up to 110.84 yuan (US$13.35) a gram. The price in October 2002 was 83.5 yuan (US$10.10).

Meanwhile, the price of Au99.99, gold for investment-oriented speculation, rose from 84 yuan (US$10.16) per gram in October 2002, to 111.18 yuan (US$13.40) last Friday.

A gold analyst with the Industrial and Commercial Bank of China said the domestic gold market is following the appreciating trend of gold against the US dollar, and predicted that prices will further rise following a flood of new capital into the SGE.

International gold prices hit a nearly 14-year high of US$14.76 per gram recently.

US-based Citibank predicted that international gold prices will keep growing over the next two years, following the recovery of the US economy, increasing demand from Asia and the depreciation of the US dollar.

Sluggish stock markets worldwide have also pushed away investors, turning them to the gold trade, said Xi Jianhua, a gold expert with the Bank of China.

"China's gold market is now firmly tied to the international gold market. It is not surprising to see China's gold prices going up in line with the rising international price of the metal," Xi said.

In addition, China's demand for gold has been on a continual increase in recent years.

Xia Yanlin, a researcher with Guangfa Securities Development Research Centre, cited gold as an ideal risk management instrument because the trend in gold runs against the trends of most other financial tools.

Xia said China has brought gold trade service to the public at just the right time. Against the backdrop of gloomy stock and securities markets on the Chinese mainland and rocketing gold prices worldwide because of tensions in international relations, the gold trade is expected to become an important investment option for Chinese individuals.

In a recent survey conducted by the Beijing Gold Economic Development Research Centre in 10 major cities in China, 70 per cent of respondents said they would invest in gold if they had money, and over 20 per cent of securities investors said they would transfer part of their capital into gold.

Experts predict that in the future, nearly 7.5 million investors will try the gold market while continuing securities trading.

If each one of them were to invest 10,000 yuan (US$1,200) in the gold market, it would mean a total of 75 billion yuan (US$9.1 billion).

Booming jewellery sales

In addition to the heavy demand for gold for investment, rising jewellery sales is another major factor behind the booming demand for gold.

Currently 90 per cent of the country's gold consumption is used for jewellery making.

For thousands of years, the Chinese have hoarded gold and worn gold ornaments, analysts said.

A pending government decision to allow individual investors in the sector may change the landscape of the gold industry worldwide.

Statistics from the China Gold Association (CGA) indicate that sales of gold jewellery and accessories in China topped 80 billion yuan (US$9.65 billion) in 2002 and has been growing by 15 per cent annually.

China is the largest potential jewellery market in the world, said Chu Xiangyin, an official with the China Council for the Promotion of International Trade.

The value of the trade is expected to grow 10-fold in the next 10 years, Chu said.

China is also expected to become a major manufacturer of gold jewellery by 2010, as a result of rising private spending power and falling import tariffs, said Kang Xingzhou, CGA's vice-chairman.

Kang predicted that China's annual gold jewellery sales volume will reach 189 billion yuan (US$22.8 billion) by 2010, or more than 10 per cent of total sales worldwide.

The demand for gold for industrial use will also witness fast increases, as China is on its way to become the world's manufacturing centre.

The manufacture of electronic and mechanical products consumes a large quantity of gold every year, said Gao Huiqing, division chief of the State Information Centre's department of strategy and development.

Increasing gold prices are bringing huge profits to China's gold mining companies.

The shares of Hong Kong-listed Fujian Zijin Mining Industry soared 50 per cent since hitting the market.

The company became Hong Kong's most popular new listing, with the initial public offering of 34.83 million mainland H-shares over-subscribed 744.3 times.

Importing gold

In spite of this, the per capita lifetime gold consumption in China is only 0.2 grams, far below the levels in Western and other Asian countries. The figure for India is 1 gram while the highest is 30 grams in the United Arab Emirates.

China, the world's third largest gold consumer and fourth largest gold producer, is suffering from a long-term supply shortage of the precious metal, said Kang.

The country's annual consumption is about 200 tons, while its production is roughly 180 tons a year.

The major reasons for the shortage are the limited natural reserves and inadequate production facilities.

In China, there are some 800 gold mines, with a total workforce of 400,000; and, on average, each mine has a daily handling capacity of more than 50 tons of ore, their combined annual gold production capacity totalling 150 tons.

However, Kang said, 80 per cent of them have a daily ore processing capacity of less than 20 tons each.

Small in production scale, backward in technology and management, and low in production efficiency, most Chinese gold mines are not competitive and suffer from high production costs, he said.

Many analysts suggest that the central bank should spend part of its foreign exchange reserves on importing gold, and place the gold purchased in the domestic market.

Purchasing foreign gold with the reserves will not only help take billions of yuan out of circulation, but will also boost overall national import volumes, Xi said, thus "easing pressures from abroad for the appreciation of the yuan."

Savings in China hit 10.9 trillion yuan (US$1.3 trillion) at the end of last November. Trying in vain for years to encourage a high growth in private spending, China has had to rely on proactive fiscal policies marked by heavy government investment to maintain its fast gross domestic product growth.

Encouraging trading in gold is one effective way to help solve the problem, said Xi.

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