Hidden Chinese dragon wants to be Simba of the global gold market

Shanghai (Sept 14)  China may be the hidden dragon in the global gold market, but it is making strategic moves in its endeavour to become a roaring lion.

A move towards this will be the launch of the international board on the Shanghai Gold Exchange on September 29 in the Shanghai Free Trade Zone. The international board, which will allow domestic and foreign players to participate, is an effort to earn global recognition for its gold market and will be followed a couple of measures that is aimed at dictating or becoming a price-setter in the global bullion market.

“The impact of China in the global arena is set to increase,” says Jeremy East, Managing Director, Standard Chartered Bank.

After the launch of the Shanghai international gold platform, China will be trying to set a benchmark price for gold on a par with London and New York next year. “That will make it a major force in Asia,” says an industry player not willing to identify.

From thereon, there will be manoeuvres, including accumulating gold within the country, to become a force to reckon with in the global arena.

Statistics and signals from China in the global market are clear indicators of its moves.

Since 2011, China has imported 3,500 tonnes of gold. “In 2013, some 1,400 tonnes of gold were imported, while domestic production was a record 438 tonnes. In fact, it has absorbed nearly 2,000 tonnes of gold last year,” says East.

Data from Thomson Reuters GFMS show that physical demand, excluding banking activity, was 1,283 tonnes last year, up 28.2 per cent over 2012.

Gold and silver volumes on the Shanghai bourse have increased sharply compared with other global exchanges. Gold volume was up 24 per cent last year against a 28 per cent drop in New York. Silver volume increased 60 per cent against a 23 per cent drop in the US bourse.

Investments abroad

Chinese investments in mining projects abroad were over $20 billion last year, says Jorge Ramiro Monroy, Managing Director of Emerging Markets Capital. “It invested $7 billion in a Peru gold mine,” he says.

China’s strategy, in gold and other minerals and metals, is to avoid disruption of supply and ensure a hedge against price spike, says Monroy.

China’s gold-friendly strategy, as StanChart Bank’s East says, is not just aimed at becoming a force to reckon with in the global market but also have under control currency movements.

The Chinese yuan dropped to 6.26 against the dollar a few months ago and has recovered to 6.16 currently. Last year, during the same time, it ruled at 6.06.

“In a few years’ time, China plans to remove control on its currency movements. At that time, the gold holdings will come into play,” says East.

“The Chinese economy has grown 24 per cent in the last three years compared with the US’ 7 per cent. Therefore, it has the money to achieve its objective,” he says.

“Chinese investments are by the Government or its agencies, unlike India where the private sector is the one that takes such initiatives,” says Munroy.

East and Monroy are surprised over India’s negative thinking against gold and investments in mining.

“China and India are a study in contrast. While one is encouraging gold, the other is discouraging,” says East, pointing out to the fact that both these nations account for 60 per cent of global gold imports.

India was a force in the gold market until September last year. “India’s measures to increase Customs duty and curb imports through the 80:20 rule, which mandates importers to re-export 20 per cent of the gold brought into the country in value-added form, did drag the market by around $350 an ounce. Since then, India’s hold in the market has loosened,” says East.

Source: TheHindu