The growth of China’s gold market has been phenomenal. China went from accounting for 7% of global gold demand in 2003 to 26% in 2013. Jewellery demand more than trebled and, once the prohibition of private ownership of gold bullion was lifted in 2004, investment demand soared. The World Gold Council recently produced a report considering the reasons behind this growth and exploring what the future holds for China. A synopsis of this report is reproduced here by Alistair Hewitt.

In 2013, China accounted for 26% of global private sector gold demand (see chart 1).1 Taking advantage of lower prices, the country’s consumers and investors increased their purchases of jewellery and bullion by a combined 259 tonnes (t). Today, China is both the world’s largest jewellery and physical bullion investment market and a key area of focus for many gold market analysts and commentators.

China’s gold market is unique, can be difficult to understand and is currently set against an economy that may falter. With this in mind, we felt the time was right for a detailed analysis of China’s gold market to understand how it has achieved its staggering growth and what the future holds. The result was China’s gold market: progress & prospects, a detailed analysis of the factors driving Chinese gold demand, produced in conjunction with Philip Klapwijk, founder of Hong Kong-based Precious Metals Insights.

By 2017, we expect Chinese private sector gold demand to have increased to at least 1,350t from its current level of 1,132t. Because of the risks around China’s growth outlook as it moves from an investment-led to a consumer-driven economy and the potential for a financial shock bubbling away, we felt it prudent to assume a conservative level of growth over the forecast horizon of 6% per annum. If the economy performs better than anticipated, then we would expect to see stronger growth in gold demand. This growth in gold demand is underpinned by three powerful forces:

People’s Bank of China

Culture: China has a strong cultural affinity with gold, which is often overlooked. Gold gifts are intertwined with many significant social occasions. Golden soup bowls and chopsticks are often given to newborn children, golden figurines are given to family members and loved ones around Chinese New Year, and more recently the Chinese jewellery trade has established Valentine’s Day as an important event in its calendar, joining Mother’s Day as an occasion for giving gold jewellery. In addition, gold is regarded as a form of money. Indeed, the character for gold in Mandarin 金 (zu jin) is also a synonym for money.

Wealth: China’s wealth has grown considerably over recent years. Between 2010 and 2013, GDP per capita at current prices grew 52% to US$6,747, and by 2017, it is expected to grow 27% to US$9,300.2 In a detailed analysis of Chinese consumer demand, McKinsey has forecast that by 2020 China’s middle class will have grown from 300 million to 500 million. To put this in context, the entire US population was 316 million in 2013. China has a huge population whose wealth is rising. This will support demand for a broad swathe of goods and asset classes, including gold.

Government support: China’s gold market could not have developed the way it has without government support. The authorities created key institutions, including the Shanghai Gold Exchange (SGE), which have supported the orderly growth of the market. It also removed barriers to purchase gold, for example, by allowing private ownership of gold bullion in 2004. More recent developments, such as increasing the number of banks that have gold import licences and the SGE’s proposal to launch an ‘international board’ in the Shanghai Free Trade Zone, will spur on the development and growth of China’s gold market.

Gold Market Development

In 1949, the victorious Communist Party inherited a country that had been ravaged by an eight-year liberation war against the Japanese invaders as well as the Civil War between the Communists and the Kuomintang. There was a pressing need to stabilise the economy and tackle the hyperinflation that had plagued China for much of the previous decade. A central plank of the new leadership’s economic policy was the introduction of a new currency. During the Civil War, a number of different currencies circulated in the country and it was imperative that this new national currency should be the only means of exchange and a store of value. Hyperinflation had eroded the role of local currencies to such an extent that most trade was conducted via barter or using gold and silver. Gold and silver, together with foreign currencies, were both the medium for measuring prices and the principal means of preserving financial wealth. To improve the chances of currency reform, it was necessary to remove this competition. The government therefore began to restrict activity in precious metals and foreign currencies, leading in 1950 to an outright ban on the private use of gold, silver and foreign monies. Similarly, all import and export of gold and silver by private persons was forbidden. All precious metals activity would be controlled by the state via the People’s Bank of China (PBoC).

Following China’s emergence from the Cultural Revolution, the initial phase of economic reform saw only a very cautious market opening, mainly characterised by growth in jewellery manufacturing capacity, especially in the Shenzhen Special Economic Zone. Indeed, the PBoC’s central role in the Chinese gold and silver markets was validated by the 1983 ‘Regulations on the Administration of Gold and Silver’, which stated that the central bank was responsible for the regulation, supervision and control of the purchase and distribution of gold and silver in China. The PBoC was also explicitly tasked with managing the country’s gold bullion reserves.

During the 1990s, the PBoC gradually adapted its management of the market to make it more efficient. This was especially noticeable in terms of an increased supply of metal to local fabricators and the move to a more market- based gold pricing system. However, it was only in 2001 that the state signalled the ending of the PBoC’s control on the setting of domestic prices, the purchasing of mined gold and scrap, and the selling of refined gold to manufacturers.3 Instead, prices would be determined via the soon-to-be- established SGE, of which the PBoC would be the founder and the key stakeholder. All refined gold would have to be sold on the Exchange and it would also be the only market for the purchase of gold by industry and financial institutions.4

Likewise, all imports of bullion would have to be made through it. The SGE started trading in October 2002. Further liberalisation occurred in 2003, when the licensing system for running businesses in gold and silver products was abolished, and in 2004, when for the first time since 1950, private persons were permitted to own and trade bullion.

More recently, there has been a flurry of activity designed to liberalise the market. In 2008, foreign banks became members of the SGE (HSBC, ScotiaMocatta, ANZ, UBS and Standard Chartered Bank) and the first gold futures contract was traded on the Shanghai Futures Exchange. In 2012, OTC interbank trading was permitted between banks and cleared through the SGE. And in 2013, two foreign banks – ANZ and HSBC – were granted licences to import gold for the first time. Looking ahead, the SGE has announced plans to launch an ‘international board’, or trading platform, in the newly established Shanghai Free Trade Zone. This will provide a platform for overseas investors to trade its products directly and for the launch of new products. In the long run, the SGE plans to integrate this with its main trading system, yet another step in the liberalisation of the gold market.

Jewellery Demand

Jewellery forms the bedrock of gold demand in China. In 2013, at 669t, jewellery accounted for close to 60% of all private sector gold demand (see chart 2). Its growth has been supported by rising incomes and the newly emerging middle class. Looking forward, there are threats to gold jewellery demand, but we expect it to continue to grow and reach at least 780t by 2017.The Chinese market is dominated by plain, 24-carat products, which Precious Metals Insights estimates represents about 85% of the market by volume. This market share increased in 2013 as the jewellery component of last year’s surge in demand was entirely based on 24-carat items. This ‘pure gold’ jewellery (known as zu jin in Putonhua/Mandarin and chuk kam in Cantonese) is almost entirely sold by weight. Shops weigh the items chosen by their customers, multiply the fine weight in grammes by the daily SGE spot price and then add a mark-up that incorporates the labour charge and a retail margin.

The competition for 24-carat jewellery from platinum, silver or costume jewellery is very limited and looks set to remain that way, for at least the medium term. ‘Pure gold’ jewellery has a very well defended position because it is the only jewellery on sale that is also considered to be a form of investment. In the long run, some younger consumers may be more tempted by K-gold, other ‘white metal’ jewellery or gem set pieces. However, a comprehensive World Gold Council usage and attitudes study in 2011 indicated that while younger consumers are more open to experimenting with different kinds of jewellery, ‘pure gold’ products easily remain the most favoured category (see chart 3).

“Gold’s place at the heart additional Chinese weddings is an important manifestation of its cultural importance.”

The competition for 24-carat jewellery from platinum, silver or costume jewellery is very limited and looks set to remain that way, for at least the medium term. ‘Pure gold’ jewellery has a very well defended position because it is the only jewellery on sale that is also considered to be a form of investment. In the long run, some younger consumers may be more tempted by K-gold, other ‘white metal’ jewellery or gem set pieces. However, a comprehensive World Gold Council usage and attitudes study in 2011 indicated that while younger consumers are more open to experimenting with different kinds of jewellery, ‘pure gold’ products easily remain the most favoured category (see chart 3).

Social Occasions

Gold’s place at the heart of traditional Chinese weddings is an important manifestation of its cultural importance. It is estimated that close to 40% of Chinese 24-carat jewellery consumption is related to weddings.5 In the third and fourth- tier cities, this percentage is higher. The growth in the number of people of marriageable age together with increasing wealth has boosted sales of jewellery for traditional wedding sets and rings. Typically, a three-piece wedding set, known in Mandarin Chinese as jiehun san jing, might consist of a necklace/pendant/bracelet, ring and earring combination. Bracelets are especially popular in southern China where wedding sets often comprise five rather than three pieces. The number of marriages, according to the mainland’s official data for China has increased by 60% since the middle of the last decade to 13.2 million at the end of 2012.6 This has undoubtedly made an important contribution to growth in demand for 24-carat gold (see chart 4). As China’s demographics change, the number of weddings may fall, but we do not expect this to happen until the 2020s. Over our forecast horizon, we expect the number of weddings to be broadly stable, with rising wealth to support higher expenditure on gold jewellery.

Consumers’ Views

A consumer survey of 1,000 people conducted towards the end of 2013 illustrates how China’s population continues to view ‘pure gold’ jewellery as a form of money, with little indication that this traditional attitude will change any time soon. Asked whether they agreed with the statement that 24-carat gold jewellery “…is as much an investment as it is a fashion item”, no less than 80% of the sample agreed, while only 4% disagreed (16% held no view either way). Moreover, support for future demand is strong: in a separate survey of more than 10,000 Chinese consumers throughout 2013, 76% of those aged between 18 and 27 also ascribed investment status to ‘pure gold’ jewellery. And the majority of respondents planned to maintain or increase their spending on 24-carat gold jewellery over the next 12 months by 44% and 35% respectively (see chart 5). For those planning to increase their spending, the principal motives were that they expect 24-carat jewellery to hold its value over the long term and they anticipate higher levels of disposable income.

Investment Demand

Since investment in bullion was permitted in 2004, demand for bars and coins has soared from a mere 10t to 397t in 2013. This phenomenal increase is connected to the relatively limited set of investment options for savers in China and investors’ faith in gold as a safe and easy-to-access asset. It is also a reflection of investors’ desire to diversify assets away from an overreliance on volatile equities, illiquid property and bank deposits that pay negative real rates of interest and that held US$7.5 trillion of households’ savings in June 2013. We judge that medium-term prospects are very positive, and demand could reach close to 500t by 2017.

In 2004, the PBoC authorised the purchase and sale of gold in bullion form among private persons for the first time since 1950. In the decade since this historic decision, China has become the world’s largest market for gold bullion. In 2013, an estimated 397t of bars and coins bought by local investors accounted for around 23% of global physical investment demand (see chart 6).

CaiBai Jewellery Store, Beijing

Investors’ Views

Latent demand for gold bullion existed in China well before the market was opened in 2004. This is apparent from the level of bar demand in the 1990s, which in certain years reached quite significant numbers in spite of the government’s prohibition of such activity. It should also be restated that ‘pure gold’ jewellery during this period was, for many local investors desperate for an inflation hedge, the best available proxy for bullion.

In fact, the use of gold as a hedge against inflation is a major factor behind the growth in domestic investment demand seen since 2004. In China, there is to some extent a German- style popular memory of past hyperinflation that continues to influence attitudes and behaviour today. The reference here is to the hyperinflation that occurred in the 1937-49 period during the Second Sino-Japanese War and the final stage of the subsequent Chinese Civil War. China again saw high levels of inflation from late 1992 to early 1996, with official figures showing an annual average peak of 24% in 1994.8

When faced with the array of investment opportunities, gold is often investors’ preferred option. Many investors are disillusioned with the stock market. Following outstanding returns in 2006 and 2007, the Shanghai Composite Stock Index dropped by a huge 65% during 2008, and although it rebounded in 2009, the trend since then has been disappointing.9 Besides this, many potential private investors feel that the stock market is too easily manipulated and that losses have been disproportionately heavy for those who are not ‘insiders’. Similarly, many view property as overvalued and illiquid. Gold, in contrast, is an internationally traded commodity, easy to buy and sell, and the majority of Chinese investors are bullish on the gold price. In a survey of 1,000 people in December 2013, 60% of respondents expected the price of gold to increase over the next 12 months.

Supply Side Developments

Data show that investment demand in China was initially quite modest following market liberalisation. It took some time before products were developed and networks established by local refiners and banks to take advantage of the new regime. In fact, it was not until late 2005 that the Industrial and Commercial Bank of China (ICBC) and the SGE launched the first spot-trading product for private investors, known as jihangjia. In December 2006, the China National Gold Group (CNGG) launched the first gold investment bar traded in line with prices on the SGE, with a guaranteed buy- back. (Even today, the buying back of bars is limited in terms of the outlets or bank branches offering this service, although the number is growing.) At the same time, a range of bars had started to appear in jewellery stores, the majority of which were aimed at the gift market and were therefore sold at relatively high mark- ups. It took a while for a genuine investment bar market to develop and, in this regard, the major banks, especially ICBC, played a critical part in developing the necessary infrastructure through their branch networks and in promoting branded investment bars of various sizes to their customers.

The commitment of the banks was also a necessary condition for Gold Accumulation Plans (GAPs) to be successfully developed in China. In December 2010, ICBC, with the support of the World Gold Council, launched the first GAP, which was aimed at ordinary savers who were interested in regularly accumulating a certain amount of gold at the bank, with the option of eventually taking delivery of the precious metal in bar form. ICBC’s GAP has proved very popular and the bank continues to roll it out to more of its 17,125 branches across the country. Four other banks have since launched similar GAPs, as have some large jewellery retailers, such as Beijing’s famous CaiBai store. Sophisticated institutional investment products have also been launched. In June 2013, the China Securities Regulatory Commission gave permission for two Shanghai-based asset management companies, HuaAn and GuoTai, to launch domestic gold ETF products. Much time had been spent on designing a gold ETF that would appeal to investors while respecting financial legislation that forbade the direct linking of securities to physical commodities. The solution was to link the ETFs to spot gold contracts traded on the SGE rather than directly to bullion sitting in a vault. On 18 July 2013, the HuaAn and GuoTai gold ETFs were launched on the Shanghai Stock Exchange, with China Construction Bank and ICBC the custodian banks responsible for backing the products with spot metal. The ETFs’ shares are quoted in yuan and each share represents 1/100th of a gramme of gold. For both funds, the minimum investment is 300,000 shares (equivalent to 3kg) and the maximum annual management fee is 50 basis points. At the end of 2013, the size of the HuaAn fund was 2.4t and the GuoTai fund 0.4t. In both cases, the size of the fund had declined since inception. More recently, in December 2013, a Shenzhen-based asset management company called E-Fund launched an ETF. This nascent market has not flourished in the same way that the physical market has, although most market participants believe this will change. As China’s institutional investment market matures, many expect its appetite for ETFs, including gold-backed ETFs, to grow.


The growth and development of China’s gold market has been incredible and, in some respects, mirrors that of its wider economy. It has gone from being a minnow on the world stage to taking an increasingly important role and becoming a key source of global demand. The foundations on which China’s gold market has been built are solid: China’s deep-rooted cultural affinity with gold, increasing levels of wealth and continued government support are robust pillars that will ensure that China’s gold demand is sustainable and ongoing.

Alistair Hewitt manages the World Gold Council’s Market Intelligence programme. The Market Intelligence team is responsible for producing insightful research on the gold market, including its quarterly flagship publication, Gold Demand Trends. Alistair joined the World Gold Council from the Bank of England where he managed its Market Intelligence activities and, before that, was the Bank’s Deputy Agent for the North East of England.