Gold Forecaster
- Global Watch
China Liberalising the
gold market - a little more
Julian D.W.
Phillips
March 8, 2006
Excerpts
from "Gold Forecaster - Global Watch."
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).
March 3, 2006
-Julian
D.W. Phillips
email: gold-authenticmoney@iafrica.com
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