Gold Standard? China
Doesn’t Set It by Yue Li | June
30, 2013, 3:57 PM
As global gold prices on
Friday recorded their worst quarter since the start of modern
gold trading in 1974, industry experts in Shanghai were
talking about China’s efforts to have a say in global
gold prices — and whether the efforts are having an
China is the world’s largest gold
producer and the second-largest consumer after India, but
industry executives and professionals have been complaining
that gold prices in China are just shadows of global prices
and don’t have any impact on other markets.
“The U.S. and Europe still have the
pricing power, although prices are usually being affected
by a number of factors, such as liquidity and overall economic
conditions,” said Yang Maijun, chairman of the Board
at the Shanghai Futures Exchange, which is going to start
night trading hours for its gold and silver contracts on
“The purpose of night trading is to
help prices [on the Shanghai exchange] better connect with
global prices, and to help achieve our goal of internationalizing
our contracts,” Mr. Yang told the audience at the
Lujiazui Forum, an annual gathering of financial policy
makers and executives in Shanghai.
Beijing also introduced interbank gold trading
in May last year, an over-the-counter market the authorities
hope that commercial banks can play a bigger role in pricing
and trading, in an effort to try to influence global prices.
Trading have so far been tepid compared with high volumes
on the Shanghai Gold Exchange, according to traders participating
in the interbank trading.
However, the absence of a comprehensive
financial system, such as a freely traded currency and an
opening up of the capital account, keeps China from gaining
a stronger foothold in global markets, Sun Zhaoxue, president
of China National Gold Group Corp., the country’s
largest gold producer by output.
Meanwhile, the average Chinese person “only
holds 4.5 gram of gold,” Mr. Sun said. “That
is far below an average of 24 grams per person globally
So unless Chinese people have more gold in their hands,
I don’t see it happen any time soon.”
China has futures contracts of gold and
silver on the Shanghai Futures Exchange and spot contracts
of the two metals on the Shanghai Gold Exchange. All the
contracts are denominated in yuan. Global trading in spot
and futures contracts are denominated in the U.S. dollar.
Gold for July delivery, the front-month
contract, rose 1% to $1,223.80 a troy ounce on the Comex
division of the New York Mercantile Exchange on Friday.
Gold prices fell 23% in the second quarter, its biggest
quarterly decline since 1974.
China has strict restrictions on capital
moving in and out of the country, and the yuan isn’t
a truly global currency despite several currency swap deals
with countries like Australia and the UK.
“Without all the restrictions lifted,
such as in trade, tax, foreign exchange and currency, China
isn’t going to have any pricing power. However, you
should know all these are under our own control –
that is to say, we choose not to have any impact on global
prices,” said Andrew Wang, general manager of precious
metal department at Standard Bank, one of South Africa’s
largest lenders by assets. China’s ICBC has a 20%
stake in the Johannesburg-based bank and has partnerships
with Standard Bank’s China unit in gold and silver
China allows only nine commercial banks
to import and export gold and silver, and has quotas for
trade of the two metals. The National Bureau of Statistics
never releases official data for gold imports and exports,
citing national secrets.
Chen Zhiwu, a finance professor at the Yale
School of Management, shrugged off the idea of China pursuing
pricing power in gold.
“I don’t think it is all that
important. China doesn’t have the pricing power, so
what?” Mr. Chen said. “No one’s going
to die if we don’t have it.”
To be sure, gold has long been considered
not just a storage of value or a hedge against inflation,
but also an asset class investors can choose when they consider
diversifying their portfolios.
In Asia in particular, gold is also something
that’s worth to own and to pass onto generations after
generations. Central banks have been net buyers of gold
over the years and are one of the main factors behind gold’s
12-year bull run that ended in April, where prices suffered
their biggest daily slump since the 1980s.
“There are plenty of other ways to
hedge and to make money, such as bond and stocks…
gold can’t generate returns, so why do we so care
about gold pricing power?” Mr. Chen said.