| 18 November 1999
1999 China Gold Economic Forum -
a Turning-point in the Reform of China's Gold Market
The Forum
In the first week in November, the World Gold Council organised the
1999 China Gold Economic Forum in Beijing together with the Research Institute,
Finance & Banking, of the People's Bank of China (PBC) and the National
Economic Research Institute of the China Reform Foundation. 140 people
attended the Forum.
In essence, it was an occasion at which the gold trade could voice its
opinions on proposed government legislation and policies. This was the
first example of its kind in the Chinese gold industry and its endorsement
by the authorities bodes well for the future of gold market reform in
China.
The Forum's delegates are major players in the Chinese gold industry.
They included 10 people from various governing ministries related to gold,
10 from the People's Bank of China's head office, 8 from the People's
Bank of China's area offices, 6 from local commercial banks, 10 producers,
55 manufacturers and retailers, 3 from metal exchanges in China, 21 from
related research institutes and 8 overseas delegates including speakers.
Central bankers from other countries in the region were also present.
A few of the more prominent attendees were:
· Mr. Tang Shuangning, Director of the Gold, Silver, Currency
Administration Department of the PBC;
· Mr. Xie Ping, Director of the Research Institute, Finance
and Banking of the PBC;
· Mr.Wang Dexue, Director of the Gold Bureau;
· Mr. Raymond Chan, President of the Chinese Gold and Silver
Exchange of Hong Kong;
· Mr. Fung Chi Kin, Legislative Councillor of the Government
of the Hong Kong Special Administrative Region.
The 2-day meeting covered a wide spectrum of issues. It started with
a presentation on the changing role of gold in the global monetary system,
followed by case studies of gold market reforms in South Africa and India.
These served as the background for suggested directions for Chinese gold
market reform, via the delivery and subsequent discussion of a comprehensive
research study, prepared by a team under the direction of Professor Fan
Gang, Director of the National Economic Research Institute of the China
Reform Foundation. This report had been commissioned earlier by the World
Gold Council.
The Report
The report comes against a backdrop of rapid growth in mine production
in China in recent years but slower growth in domestic consumption. An
important reason for the latter is that the PBC - although it now changes
the prices it uses to reflect the international price far more frequently
- remains a monopoly buyer and seller under the state-unified-purchase-and-allocation-system.
Such a structure, based on a planned-economy, has become increasingly
obsolete in the modern Chinese socialist-market-economy and results at
times in smuggling and heavy subsidy of the mines, while also frustrating
the development of a modern and innovative manufacturing and distribution
sector. At a time of relative stability in the Chinese economy and the
on-going modernisation of other state-owned industries, now is an ideal
time to bring gold market reform to fruition.
The outline of reform presented to the forum for discussion had several
underlying features. First, given the many and overlapping bureaucratic
layers involved in gold, lines of management accountability need to be
clarified and reduced. At the same time the PBC will, in stages, withdraw
from the market. Finally - and recognising some potentially difficult
transitional problems - consolidation of the mining sector will be necessary
if world-class producers are to be created.
A gold exchange market
The main practical proposal, however, was that a gold exchange market
should be established. Given the need for learning by experience, the
report suggested that this should proceed in phases - though some participants
in the forum felt that the timetable might in favourable circumstances
be telescoped.
In the first phase, the market would be open, for spot transactions
only, to the major domestic players. Mines would be free to sell an increasing
proportion of their output on the market and manufacturers would no longer
have to buy from the PBC. In phase two, gold producers would sell all
their output on the market, individuals would be able to use it and futures
transactions might be permitted. Phase three would usher in full liberalisation
with removal of the ban on gold imports and exports and the PBC's complete
withdrawal from the market.
Finally the report argues that, while these reforms are moving ahead
and the role of the PBC in the gold market is changing, consideration
should be given to increasing the amount of gold in China's official reserves.
While total reserves are large in international terms, the proportion
of gold is arguably too low if the country wants to avoid an over-reliance
on currencies.
Timing
As far as the reform timetable is concerned, it is suggested that Phase
1 commences next year and may take up to two years to complete. The steps
in Phase 2 are perhaps less time - critical but the opening up to international
markets envisaged in Phase 3 will, it is asserted, require full capital
account convertibility of the RMB, the local currency.
Reactions
A full and vigorous debate took place around the report's recommendations
and some minor modifications will be made in the light of this. While
it was of course accepted that the report, written as it was by an independent
research institute, carries no official weight, it was noticeable that
no dissenting voices were heard from the audience. No one disagreed with
the need for the kind of reforms advocated and, if anything, there was
a feeling that they could proceed faster.
The forum was an undoubted success in consolidating a consensus for the
continuing perfection of the reform process. Council staff will remain
in close touch with the Chinese authorities and the industries concerned
in order to provide all the help necessary to bring about reform.
Initial comments from the PBC after the Forum
· It was a very good forum. The WGC has done a good job
for China's gold industry. The consensus from the trade was on how to
speed up the reform; the main difference is on the ways to do this and
the speed of transition.
· This forum was a valuable opportunity to share ideas on the
subject. The opportunity to hear different opinions from various sources
is extremely useful.
· The PBC representatives will consolidate all opinions given
at the forum and submit them to their superior authorities in the near
future.
· The PBC strongly felt that there is a need to give more detailed
training on gold banking to local commercial banks in order to allow them
to participate in the gold business as part of the reform process.
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