Annual gold demand on the Chinese mainland is expected to triple in coming years as a result of the ongoing gold market deregulation, according to the World Gold Council.

In a report released Sunday in Shanghai, the council forecast a rise in gold demand on the mainland from the current 200 tonnes to 600 tonnes a year, based on the effects of a similar market deregulation on India. Much of the extra 400 tonnes a year would come from imports.

The report comes on the eve of the September 6 to 7 conference of the London Bullion Market Association in Shanghai, being held for the first time in China.

The mainland now ranks No 4 in gold demand in the world.

Council statistics show that gold demand on the mainland surged by 30.8 percent year-on-year to 51.5 tonnes during the second quarter of this year, in which 50 tonnes were for jewellery and 1.5 tonnes for retail investment.

The mainland's gold demand reached 207.6 tonnes last year, up from 203.9 tonnes in 2002 and 10 tonnes in 1982.

"The Chinese people are generally becoming more affluent (because of the nation's steady economic growth) and gold, while it may no longer be a sole destination for investment, will certainly play its ancient Chinese role of conspicuous display of wealth, as an adornment and as a perceived store of wealth," the report said.

Demand for jewellery in all its forms on the mainland will also be very strong, particularly in the booming cities of China's eastern seaboard, it said.

The control of gold as an investment or in jewellery form has been thrown open to small investors on the mainland by making the precious metal available in pass-book accounts via commercial banks as bullion, coins and jewellery.

Free entry into the gold jewellery business for domestic and foreign companies was permitted from April 2003. Permission is no longer required to operate as gold jewellery manufacturers, wholesalers and retailers.

But imports of the precious metal are still controlled by China's four State-owned commercial banks. And gold jewellery imports are only allowed to seven firms designated by the People's Bank of China, the central bank.

The Chinese Government is also "alarmed by the inflationary potential of vast private savings, and so may be encouraging gold purchase as a way of decreasing demand," the report said.

"The role of gold as a consumption and investment choice could be adversely affected by concerns of higher personal investment in private pensions and health care to cover the collapsing dependency ratio (on the mainland) - by 2030 only 2.4 workers will carry every pensioner," it said.

Major uncertainties affecting gold consumption on the mainland are that the current stock of gold in China is estimated to be an 5,000 to 8,000 tonnes, and the intentions of the central bank in its reserves policy. Now, China's central bank reserves 600 tonnes of gold, accounting for 2 percent of its total foreign exchange reserve, compared with the European Central Bank's 15 percent, it said.

The mainland's foreign exchange reserves stand at some US$470 billion - among the highest in the world.

Another factor for gold consumption is competition in the jewellery sector, the report said.

While gold has benefited from a number of marketing initiatives enacted by the World Gold Council, platinum has also been a major success story in China with consumption for jewellery purposes running at 50 tonnes a year.

However, gold is making a come-back with the promotion of "K gold" (Italian-inspired 18 carat gold) as a less expensive alternative to platinum from late 2003.

"We are very encouraged by the success of our "K gold" campaign. We are confident that consumers' interest in Beijing and Shanghai for "K gold" will sustain and will have a beacon effort on other key cities in China," said Albert Cheng, managing director of the council's Far East operations.

The mainland is also the world's fourth biggest gold producer.

Gold output on the mainland stood at 111.3 tonnes in the first seven months of this year, up 7.2 tonnes or 6.9 percent from a year earlier, say statistics from the China Gold Council.

The mainland's gold output reached 200.6 tonnes last year, up 5.7 percent from 2002.

(China Daily September 6, 2004)