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China Liberalising the gold market - a little more.

Recently we made a comment that China's liberalising of the gold market there was not nearly what it seemed. We highlighted this by saying that when regional prices for gold had dropped in line with Shanghai prices of gold the liberalisation of the Chinese market would be complete. We hold to this view. However, China has started down that road. This is not their objective though!

We see China's action as reflecting the nation's preparations for the monetary system of China within the global monetary system and in the light of the dangers to that system that lie ahead. In China we see a pragmatic approach to the future, without the domination of the developed world. Imagine now you are collecting masses of U.S. $s. You know the future for the $ is dubious at best. You want to accumulate gold, but the market will whip up the prices on your approach, so what do you do? Surely you will do your best to keep those surplus $s away from your internal currency and try to re-export them as investments. This is what China is doing, so the present moves to liberalise gold in China has to be seen as an attempt to duck the damaging future of the $, as far as they are able to. In moves to that end, last week saw these changes:

The Bank of China will permit investors to buy and sell gold for the U.S$

The Bank of China, the country's biggest foreign currency lender, plans to allow investors to buy and sell gold using their U.S. $ accounts. This is an indirect way for China to buy gold for its reserves on top of any plans they have to buy direct into their reserves [see below].

The Bank of China's Shanghai branch will permit these $ reserves to be used to buy gold this year and expand the pilot to its other branches in China. China allowed Investors to buy and sell gold only through Yuan accounts previously, though the sales were based on the $ value of gold on international markets.

This step is an important separation of China's internal currency and its foreign exchange reserves. The Chinese Banking system is sufficiently undeveloped to allow this without the problems a developed country would face. Also trading in gold this way brings far more gold under the indirect control of the Chinese authorities.

In a real liberalisation move the Bank of China will widen gold trading by cutting the spread on gold prices [the difference between buying and selling prices] by up to 20% to further boost trading in Shanghai. The lowest spread will be 0.62 Yuan (8 U.S. cents) per gram during the period until May 27th. 2006.

China Leads From The Front By Doubling Its Gold Reserves This Year

Amazingly the National Development and Reform Commission has stated that China intends to more than double its gold reserves to 1,270 tonnes this year. Why did it publicize this before the event we ask ourselves? But then why do European Central Banks publicize their selling programmes? Clearly this takes the surprise out of their dealings and gives them a better chance to buy gold without the market sending the prices into the sky. You may think that another 650 tonnes is not a large amount, but to put it in context it is 150 tonnes more than the 'ceiling' the Central Bank Gold Agreement signatories have set themselves this year and for the next three years thereafter, annually.

In 2005 China increased its gold reserves by 20 per cent to 620 tonnes and now it is going to add a further 650 tonnes.

The National Development and Reform Commission is also expected to release a new gold industry policy and development plan shortly which will include limiting foreign gold mine ownership to less than 50%.

Whilst this may reduce the profits to Western companies exploring for gold in China, it tells us that China takes gold very seriously. Further it can now be seen that gold is deemed to be, by the Chinese government a strategic asset. Let's just focus on that for a moment.

So much speculation has been going on about China's view of gold that it has been difficult to get a clear view of China's gold policy in the future. Now we have some definitive moves that clarify China appreciates the value of gold and sees it in the context of the future of the global monetary system. What's more, it is taking pragmatic steps to protect itself through the steady acquisition of gold and the exporting of its surpluses to ensure they do act as effective investments, without interfering with the internal monetary system in China.

Using $ reserves wisely.

China is considering launching its QDII (qualified domestic institutional investor) program to balance its capital account, officials from the country's state forex regulator, the State Administration of Foreign Exchange (SAFE) said. A major problem China faces, alongside most countries with a Trade surplus, is how to best employ them. To let them impact on ones internal currency is clearly a problem yet it is the traditional method of integrating surpluses resulting in the appreciation of one's own currency. So to push away this surplus by buying goods to develop ones infrastructure, or investing them in overseas assets, allow government to prevent the impact of these surpluses, preventing a revaluation of ones currency. This is what China must do as it is and is likely to do in the future, accumulating more and more reserves!

The QDII program, which opens the door for overseas investment by using forex accumulated within the country, will offset capital inflows to China, which pressure the country's currency the Yuan to appreciate.

The ultimate objective of the Central Bank of China is to achieve the convertibility of the capital account on a principal basis not long in the future and complete convertibility in the long-term. The Chinese central bank governor, Zhou Xiaochuan's spoke of this late last year, when the governor said China would achieve ultimate free convertibility during the 11th Five-Year Plan (2006-2010).

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