China has experienced an unprecedented gold rush in the past few months, as the government hastens to turn currency reserves into gold and encourages its citizens to buy up the precious metal.
China is now the world's biggest producer of gold
Last year, China's gold output was of over 330 tons, making it the biggest producer in the world, after South Africa. But this is still not enough to cover Chinese demand, which is growing steadily.
Yet gold has only been traded in China since 2002, when China’s first gold futures market was opened in Shanghai.
"To begin with business was slow but this has changed," explains Gold Investment Corporation analyst Chen Yiqun. "The Shanghai Gold Exchange is now the biggest in the world."
The People's Bank of China is the country's number one customer for gold
Bank of China is number one customer
There is no official data for Chinese gold imports but what is known is that in the first nine months of 2010, some 88 tons of gold came into China via Hong Kong – more than twice the year before. The number one customer was China’s central bank.
"In May 2009, the central bank announced that its gold reserves had increased from 600 tons to 1045," says Chen Yiqun. "This has probably gone up since then. The Chinese government is worried it might never see the money it lent the US government and that’s why it is turning part of its massive currency reserves into gold."
For a long time, the Chinese government had banned citizens from possessing a lot of gold but this too has changed and it is now actively encouraging Chinese investors to buy gold.
Useless but precious
Millions of Chinese who have made money in the past few years do not know what to invest in on China’s underdeveloped capital market.
Many are buying real estate, which is making prices soar and people are speculating on everything, from raw materials to food, which is making living costs rise. Inflation is at a higher point than ever in the past two years.
But gold soaks up excess liquidity – people can invest in this rare and largely useless metal without making the price of raw materials or food rise and thus without having a harmful impact on industry or the population.
The value of gold is rising on the world market
Elephant in the room
The more gold the Chinese government and people buy, the higher its value and thus demand is growing – all over the world.
But Chen points out that "there is still plenty of legroom. The price of oil has risen by 13.5 percent in the past 10 years, copper by 11 but gold has only gone up only 4 percent."
There is now a lively debate in China about the value of gold, which many believe could end up replacing the US dollar as the anchor for currency exchanges.
Occasional calls for a return to the gold standard that was abandoned in the mid-20th century have been ignored.
However, the debate was recently reignited when World Bank head Robert Zoellick suggested that it was worth thinking about as an alternative monetary asset. He said that gold was definitely "the elephant in the room" that should be addressed by policymakers.
Author: Felix Lee / act
Editor: Thomas Baerthlein