China to Open Domestic Gold Market to the International Community

on Nov 12, 2012

On 12 November 2012, Reuters reported that China, which is set to overtake India as the world’s largest gold consumer in 2012, is looking to further open up its domestic gold market to the international community, with Shanghai likely to introduce gold exchange traded funds (ETFs).

**ETF Products to Be Launched in China**
In addition to gold ETFs, the Shanghai Gold Exchange (SGE) is also expected to launch an interbank market early in December. Reuters quotes SGE Chairman and President Wang Zhe as saying that with domestic market maturing and opening up, “the exchange will launch over-the-counter trading, gold ETFs, Friday night trading and improve the leasing market.” Mr Wang, who was speaking with reporters at the London Bullion Market Association’s (LBMA) conference in Hong Kong, told Reuters that all banks trading on the China Foreign Exchange Trading System and the National International Funding Centre would eventually be able to trade in the market, including foreign banks. “In the beginning it will pilot with Chinese banks and eventually be open to all,” pointed out Mr Wang. The interbank market is expected to start with spot contracts at first and to gradually offer forward contracts.

“There is no doubt that gold ETF products will be launched in China,” notes Zheng Zhiguang, general manager at Industrial and Commercial Bank of China Ltd (HKG:1398, SHA:601398), as quoted by Reuters. “It’s entered a study phase on regulation and operation.”
**Global Market**
!m[Shanghai Gold Exchange Planning ETFs ](/uploads/story/775/thumbs/pic1_inline.png)Mr Zheng also noted that although ETF trading would start as a domestic market, it could in time be opened up to global markets. Reuters quotes Xie Duo, a People’s Bank of China (PBOC) official, as saying that the central bank would open the market further and “quicken the steps” to integrate it into the global market. The PBOC, however, has not provided a timeline for issuing more gold import licences, with only nine commercial banks currently having such licences.

**China Could Add More Gold Reserves**
And while Mr Xie also indicated that the PBOC’s policy was to encourage residents to hold physical gold, he did not comment on the bank’s own gold-buying policy. Bloomberg reports that China’s share of reserves in gold is less than two percent, whereas the US, Germany, Italy and France for instance keep more than 70 percent of their reserves in gold. “When comparing China to the US, it would seem that in China, gold asset allocation can only go in one direction,” noted LBMA’s chairman, as quoted by Bloomberg. “The country has only 2 percent of its reserves in the form of gold compared with the US at 75 percent.”

Data from the International Monetary Fund (IMF) indicates that in 2012, Brazil, South Korea and Russia added gold to their reserves. “Emerging-market economies from the G-20 countries are looking to elevate their gold holdings,” noted Ashish Bhatia, manager of government affairs at the World Gold Council, as quoted by Bloomberg, adding that there was “renewed interest from central banks on the demand side.”