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China’s gold market development portrays solid, on-going and for the long term

31 may 2021

In one of its past studies of the Chinese gold market, the World Gold Council (WGC) talks about the formation of this market and draws a number of conclusions that are of interest today having been confirmed by the development of the gold mining industry in China.

The research, which WGC committed to Precious Metals Insights (PMI), is a synthesis of the Founder and Managing Director of PMI, Philip Klapwijk’s intimate knowledge of the Chinese gold market and the World Gold Council’s expertise. Besides in-depth interviews by PMI and WGC with many key gold market participants in Shenzhen, Shanghai and Beijing, the report draws upon the extensive consumer research the World Gold Council has undertaken over recent years.

According to market analysts, China faces important challenges in moving from an investment and export-led growth model to a more balanced private consumption that plays a larger part. This process should result in a considerably higher level of consumer spending, which ought to favour the jewellery sector. While GDP growth rates may fall, private consumption’s share of the economy is forecast to rise. For most people, ‘pure gold’ articles will continue to be an essential purchase for weddings, festivals and other gift-giving occasions. At the moment, there is little indication that 24-carat jewellery’s unique appeal is waning among the general public.

Gold demand in China could not have flourished without the blessing of the authorities, the report says. Extensive gold ownership by the people is viewed as increasing the nation’s overall wealth, and it also absorbs cash in the economy and limits the inflationary impact of rapid growth in the money supply. This in turn is linked to China’s large balance of payments surpluses.

Currently, China has become the most important physical gold market in the world. It is both the number one producer and consumer of precious metal. And the country is the world’s largest bullion importer. China’s exchanges have also established themselves as regional leaders and key players in the global gold trading system.

The report concludes that China’s gold market development is solid, on-going and for the long term. Even if there are occasional setbacks along the way, the country’s massive population, continued rapid economic growth and, deeply rooted pro-gold culture will ensure that the spotlight will continue to be on China for many years to come.

As is well known, Shandong is the historic heartland of China’s gold mining industry, and it is the largest gold producing province in the country. China’s economic growth and boom in urban population have boosted China’s burgeoning middle class. Many of these cities will benefit from China’s increasing domestic trade, improved transport infrastructure, and government policies designed to support their growth.

China’s economic development has flourished from a poor, under-developed country to a major trading nation with burgeoning levels of wealth and a positive growth outlook. The same can be said of China’s gold market. It has gone from a minnow to becoming a large and increasingly sophisticated market. The pool of private savings is vast with further scope for consumers to increase their exposure to gold.

In just 30 years, China’s economy became the world’s second-largest and China has become an ‘upper-middle income’ country. At the same time, China has come from nowhere to become the world’s largest consumer and producer of gold. Over the medium term, growth in income and the public’s pool of savings should support an increase in gold jewellery and investment demand. In parallel, the Chinese gold market has developed from almost non-existent to the world’s largest in terms of production and consumption of physical gold. In 1950 the ‘new China’ prohibited private ownership of bullion and put the gold industry under state control.

Over the years, the People’s Bank of China (PBoC) abandoned its monopoly on the purchase, allocation and pricing of gold. The decade since has seen extraordinary growth in private sector demand for jewellery and, more recently, investment gold. Economic growth in China is slowing. Given the rebalancing of the economy towards consumption, it is likely that overall consumer spending will grow at a faster rate than headline GDP. Similarly, the public’s enormous pool of savings will only get deeper as the economy expands. This means that there will be plenty of room for growth in gold investment demand. Only a major economic setback, caused perhaps by a bursting of the ‘credit bubble’ seriously affecting economic growth, would cloud this positive outlook for the Chinese economy and gold demand.

The new People’s Republic of China quickly placed the gold market under the strict control of the state. In 1949 the victorious Communist Party inherited a country that had been ravaged by an eight-year liberation war against the Japanese invaders as well as the Civil War between the Communists and the Kuomintang. There was a pressing need to stabilise the economy and tackle the hyperinflation that had plagued China for much of the previous decade. A central plank of the new leadership’s economic policy was the introduction of a new currency.

During the Civil War, many different currencies circulated in the country and this new national currency needed to be the only means of exchange and store of value. Hyperinflation had eroded the role of local currencies to such an extent that most trades were conducted via barter or using gold and silver. Gold and silver, together with foreign currencies, were both the medium for measuring prices and the principal means of preserving financial wealth. To improve the chances of the currency reform it was necessary to remove this competition. The government, therefore, began to restrict activity in precious metals and foreign currencies, leading in 1950 to an outright ban on private use of gold, silver and foreign monies.

Similarly, all import and export of gold and silver by private persons were forbidden. All precious metals activity would be controlled by the state via the PBoC. Economic reform post-1978 saw the gradual re-establishment of a gold market in China under the close control of the PBoC. The end of the PBoC’s monopoly and the setting up of the Shanghai Gold Exchange accelerated gold market development from 2002 onwards. The initial phase of economic reform saw only a very cautious market opening, mainly characterised by growth in jewellery manufacturing capacity, especially in the Shenzhen Special Economic Zone. Indeed, the PBoC’s central role in the Chinese gold and silver markets was validated by the 1983 ‘Regulations on the Administration of Gold and Silver’ that stated the central bank was responsible for the regulation, supervision and control of the purchase and distribution of gold and silver in China. The PBoC was also explicitly tasked with managing the country’s gold bullion reserves.

During the 1990s the PBoC gradually adapted its management of the market to make it more efficient. This was especially noticeable in terms of an increased supply of metal to local fabricators and the move to a more market-based gold pricing system. However, it was only in 2001 that the state signalled the ending of the PBoC’s control on the setting of domestic prices; the purchasing of mined gold and scrap; and the selling of refined gold to manufacturers. Instead, prices would be determined via the soon-to-be-established Shanghai Gold Exchange (SGE) of which the PBoC would be the founder and the key stakeholder. All refined gold would have to be sold on the SGE and the Exchange would also be the only market for the purchase of gold by industry and financial institutions. Likewise, all imports of bullion would have to be made through the SGE. The SGE started trading in October 2002. Further liberalisation occurred in 2003, when the licensing system for running businesses in gold and silver products was abolished and in 2004 when for the first time since 1950 private persons were permitted to own and trade bullion.

China is still a long way from having a completely ‘free market’ in gold, but it is gradually moving in that direction. The Chinese gold market remains under the indirect control of the state. Market mechanisms have been introduced and, to a large extent, private trade in gold has been unshackled. However, there are substantial barriers in place, particularly in terms of the interface between the Chinese and international markets. This is understandable given the tight controls that exist on capital flows and the foreign exchange market. Indeed, these controls on currency and capital flows and the operation of exchange rate and monetary policy by the PBoC would be completely undermined if all the remaining restrictions on the gold market were to be lifted.

Further liberalisation will be dictated by the broader economic objectives referred to above. As such the pace is likely to be slow and steady. One can expect similar, gradual moves towards greater openness.

Aruna Gaitonde, Editor in Chief of the Asian Bureau, Rough&Polished


The World Gold Council is the market development organisation for the gold industry. Working within the investment, jewellery and technology sectors, as well as engaging with governments and central banks, our purpose is to provide industry leadership, whilst stimulating and sustaining demand for gold. WGC develops gold-backed solutions, services and markets based on true market insight.