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China’s long tradition of gold buying means the retail business in the country is likely to remain healthy for years to come. The value of gold in Chinese culture and the country’s powerhouse economy combine to maintain a robust gold market in many regions. But even China’s market is subject to peaks and troughs and 2014 seems to be proving to be one of the dips in the cycle.
Philip Klapwijk, managing director at Hong Kong-based consultancy and advisory firm, Precious Metals Insights, says the jewellery market in the first quarter was up 10% in China, whereas bar and coin demand generally was down 55%.
“The market has been pretty weak in the second quarter of 2014,” he says. “The Shanghai premium has been fairly flat. There is a bit of a hangover after last year when people were buying ahead for events such as weddings. The general tone of the market is not as strong as it was.
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“The use of gold for financing seems to have died down a bit, which seems to be affecting the flows. The second quarter was outstanding in China in 2013, so the benchmark for the second quarter of this year will make the outcome look unflattering.”
That said, the fundamentals of the gold market in China remain strong and the structure of the market is conducive to retail buying. One market source tells Euromoney that he expects to see a 25% growth in consumption within four years.
“China will change the way people invest in gold,” he says. “It has one of the best banking platforms for people to invest in gold, unlike in the west. In the market now if you want to look at what is happening in the securities market, you look at the US, but if you want to look at the spot market, you look at Shanghai.”
The source adds: “The Chinese have a history and affiliation to gold. Wealth for middle class families is increasing drastically and that increase in wealth is creating demand. Regulation-wise, China has a very open policy to people importing and buying gold. The retail shops are flourishing… it’s very easy to get hold of.”
The Shanghai Gold Exchange (SGE) is a key part of the Chinese gold market’s infrastructure and facilitates transactions within the country. But although it is developing rapidly, some market players want to see changes to the exchange.
“The SGE would like to develop their trading platform, but it needs time,” says a second source. “Their charges are sometimes too high. As an investor, you want to sell if it is at a premium, but it is not always that easy to sell instantly. I think it will take more than one year to develop properly. I hope gold goes up… if the SGE implements changes, there will be some stimulation.”
This year’s Euromoney China retail gold survey invited responses from May 19 to June 13. All submissions were collected online from investors in gold and gold-backed products from the People’s Republic of China and there were 701 responses in total.
Respondents were asked to name banks whose gold investment services they used and to rate their providers on the scale of one (poor) to seven (excellent) for criteria relating to client service, product range and investment strategy and advice. Scores were calculated as an arithmetic mean of ratings received per bank, with banks requiring a minimum coverage ratio of 5% of the response base to be included in the results.
ICBC topped the overall league table, followed by Bank of China in second place and Bank of Communications in third. China Merchants Banks came fourth and China Construction Bank fifth. ICBC also swept the board in the sub-categories, topping the table in physical gold, paper products, structured products and the Shanghai Gold Exchange.
Shanghai Pudong Development Bank was second in physical gold, with Bank of Communications second in paper products and Bank of China second in both the structured products and Shanghai Gold Exchange categories.
Looking ahead to the rest of 2014, Klapwijk says: “The second half will be quite soft. I think we will see the market down 8% to 9% for jewellery year-on-year for 2014, with bar and coin demand down much more heavily.”
Despite the slightly gloomy predictions for the rest of this year, there remain many reasons to be optimistic for the Chinese retail gold market. The country continues to see healthy fundamentals and is gaining more prominence as a vital part of the international gold sector. China’s historical affiliation with gold is no doubt set to continue.
