The latest from the
London Bullion Market Association conference in Hong Kong...
THE ANNUAL conference
of the London Bullion Market Association – the "premier
professional forum for the world's bullion market" as Haywood Cheung of
the 100-year old Chinese Gold & Silver Exchange put it this morning
– is taking place right now in Hong Kong.
The timing could hardly seem more urgent. Hong Kong has
always had great importance to the global precious metals market – particularly
since the 1970s, as several speakers noted on Monday, day one of the LBMA's
two-day 2012 conference. But while Hong Kong's dominance as Asia's bullion
hub may yet be challenged (it beat off "stiff competition" to be
this year's Asian LBMA venue, Cheung writes in the South China Morning Post; Singapore removed general sales tax
from gold last month, and now its gleaming new freeport
vaults are already booked out, with a second facility being discussed), it's
Hong Kong which remains "the gateway to China".
And China remains the big prize for the record 700+
delegates from 279 different miners, refiners, banks, dealers and secure logistics providers gathered here from 39
"China's appetite for gold has increased rapidly,"
explained Albert Cheng, managing director for the Far East at
market-development organization the World Gold Council after lunch today, "with
gold demand growing by an average 24% per annum since 2007.
"China's share of global gold demand doubled from 10%
in 2007 to 21% in 2011." And as Cheng's chart shows above, China in fact
overtook world #1 consumer India in the first half of 2012.
None of this happened by accident. Not according to
keynote speaker Xie Duo – general director of
the People's Bank of China. Listing China's #1 position in both gold mining
production and now consumer demand, "Gold plays a very important role in
the formation of the financial market system," he explained –
repeating what PBoC governor Zhou Xiaochuan
told the LBMA's 2004 conference in Shanghai, and then reminding the grand
ballroom of the
plan which Zhou then set out:
Transform gold from a commodity to a financial investment
market: The Shanghai Gold Exchange now boasts 33 financial members, and 3
million individual clients. Meantime, more than 30 commercial banks are
active end-to-end in gold, offering both physical and paper gold, and acting
as "an important channel for Chinese citizens to be involved."
Transform it from an immediate-delivery to derivative market
Deferred settlement was launched on the Shanghai Gold
Exchange in 2004, in a bid to allow greater trading volumes without being hit
by shortages . From 2008 to 2010, it accounted for
over 60% of the SGE's volume, rising to 73% in 2011. Compared to other "spot"
contracts worldwide, said Xie, it's now the most
heavily traded, with turnover of 6,000 tonnes last
China's trading from a domestic to an international market
Twenty-four hour trading is crucial today, the PBoC general director said. So in 2005 the SGE launched
its night-time session, to overlap with the afternoon in London's physical
market and morning trade in New York's Comex gold
futures. Now that period – from 21:00 to 02:30 – accounts for a
third of total SGE volume. It's particularly welcome for those foreign banks
which have become members of the exchange, starting with HSBC in 2008.
All this adds up to "big progress in the Chinese gold
market," Xie said. "But there is still a
long way to go." And which way is that? Remember, we are in China.
"Frankly speaking, this success is the result of free
choice by the market and the support of policy," Xie
went on. "The government took effective measures to guarantee smooth
In particular, late last year it banned the "illegal"
gold market, closing down all trading centers outside the officially
recognized and managed Shanghai Gold Exchange and the Shanghai Futures
Exchange (SHFE). The concern was that "the gold price rise had led to a
surge in domestic demand, and that led to margin-trading businesses using
overseas derivatives contracts as the underlying asset. That was very risky
because of the leverage. So the government is fighting the underground
Laying out his own "proposal" for how China's
gold market should develop from here, Xie made this
concern – the level of risk worn by China's citizen traders – the
basis for 3 steps in his 5-step plan. In fact, together with the parallel aim
of "guid[ing] investors
to trade on the legitimate platforms", keeping a tight rein on
free-market provision of gold products pretty much sums it up:
#1. Ensure development of mature market
#2. Perfect the laws, rules and relative policies
#3. Perfect the mechanism of risk aversion and investor
#4. Strengthen the market system & accelerate
#5. Promote further opening to the outside world
That last point is for "later on", Xie added, with China's gold market only "fully
opened" to foreign players once the other planks are assured. No, this
doesn't yet cut both ways; the giant ICBC bank gained approval to buy a major
investment bank's operations in Argentina. Yes, the Communist Party may have
long considered it "glorious to get rich", but its brand of
capitalism remains very alien to the developed West's idea of financial fun.
Seeing the trouble that has caused, however, you might forgive
China's leaders for wanting to marry strict regulation with a boom
in financial services. Gold investors everywhere might want to thank the
bureaucrats' strong hand, too.
"Is China's gold investment demand sustainable?"
asked Albert Cheng of the China/Asia panel this afternoon. Yes, replied Zheng Zhiguang, general manager
of precious metals at ICBC. Because over the next 10 years, there will be
"very stable, progressive economic development. So household incomes
will continue to grow. It's in the government's plan."
Put another way, and again looking at the question of a
"hard landing" for Chinese consumers and therefore their
double-digit gold demand growth rate, "Beijing has tremendous means to
achieve its growth targets," said Professor Yu Yongding,
a former PBOC member and now at the Institute of World Economics and
Politics, just before the conference's morning break.
Western gold owners should hope he's right.