LBMA/LPPM Precious Metals Conference 2012 - Hong Kong

Introduction

Good morning, ladies and gentlemen, and welcome to this conference, the first that we have held in Hong Kong, but probably not the last. My name is Stewart Murray. I am Chief Executive of the LBMA. Our first conference was held in Dubai in the year 2000, almost 13 years ago, and I am only surprised that it has taken so long for us to find the wonderful venue of Hong Kong.

Statistics

My main task this morning is to show you the communicators that you will be using for various purposes during the conference. Before that, though, I would like to show you some statistics:

• 13 – this is our 13th conference – unlucky for some? Clearly, 13 is not an unlucky number in China.
• 700 or 700+ is the number of delegates registered for this conference. The previous record was last year in Montreal with 533, so 700 is clearly a lucky number, at least for the LBMA in China.
• 279 is the number of different companies who are gathered here today and I guess that is why many of you are here: to meet these other companies.
• 39 is the number of countries represented at this conference.
• You may wonder what the last number is. Some of you may think it is the number of metals for which the LBMA is responsible – gold and silver. Although that is true, this number represents the number of marriages that have happened as a result of people meeting each other at our past conferences. At least, that is the number I know of; there may be others, in which case please do tell me. Unfortunately, or perhaps fortunately, I do not know about the number of divorces that have happened.

Communication Devices

1. Introduction

Now for the ‘beam me up, Scotty’ devices that you found on your chairs. Those of you who have been at previous conferences will appreciate that this is a much smaller and neater device and I think it is also easier to use, especially for texting. Those of you who have not been here before, with this device you can vote, give us feedback, send texts, and you can even use it as a microphone. I want to briefly show you the main way to use it and then we will have a go at using it for a real application, namely for voting on what you think next year’s gold price is going to be.

2. Instructions

I am going to ask you to tell us what kind of organisation you represent and you have 10 seconds to do so, starting now.

[Vote takes place]

You can see your responses and if you add all the numbers up, with luck, it comes to 700, but I guess some of you may not have voted.

3. Gold Price Forecasts

Moving on, we now come to the gold price forecasts. In Edinburgh, in November 2009, the price was 1058. You forecast a year later it would be 1181; in fact, you were a bit conservative, because the price turned out to be 1298. In Berlin, you were very conservative: you voted for 1450 and the price rose in the following year to 1817, so again you were a bit on the cautious side. However, in Montreal, last year, you were very bullish. The price then was 1817, not far off the record and you thought the price would continue to rise: you forecast 2074 by November this year; in fact, the price fell back a little to 1738.

The pm price was fixed at 1738 on Friday last week and we are now going to ask you to forecast what you think the price will be in US dollars on 27 September next year, which is the Friday before our conference in Rome. You can enter a number from 600 to 3,000 and then press the green button; we will give you all of 10 seconds.

[Vote takes place]

We are not going to tell you the price until tomorrow. We will ask the question again and you can then see whether what you have heard over the next day or two is influencing you, as a group, in what you think of the future price.

Acknowledgements

I know our Chairman, who is going to speak in a moment, has a lot of thanks to say and I am not going to preempt him. However, there are just a couple of organisations that I would like to thank in particular, even though that is a bit invidious because there are so many organisations that we have to thank, but I will leave David to do that.

The two that I would like to mention in particular are: Malka Amit, who very generously carried all our conference materials to Hong Kong and also brought them through customs in very good time; and the people in the Hong Kong office of HSBC, who provided Ruth with a tremendous amount of help during the planning stage of this conference. Thanks to all of them.

Of course, there is one group that I would like to thank on your behalf and that is my colleagues in the LBMA, who have been working very hard for many months and especially over the last few days to make this conference a success, which I very much hope it will be. They are here for you, so if you have any problems or suggestions please do contact us.

With that, I now have great pleasure in handing over to the chairman of this session, David Gornall, who is of course also the Chairman of the LBMA, which he has been since June last year. David needs absolutely no introduction to this group, so thank you very much and over to him.

Introduction

Good morning, ladies and gentlemen, welcome to Hong Kong. Once again this year we have joined forces with the London Platinum and Palladium Market in the organisation of the conference agenda and once again we have increased the number of guests and attendees to a record number, with well over 700 of you registering for this conference. We thank you all for attending.

Returning to China

Choosing Hong Kong as a venue for this year’s event is, in fact, the first time that we have returned to the same country as the venue for the conference. Many of you will remember our fifth conference, which was held in Shanghai in 2004. This in itself says a lot about the relevance of China to the global precious metals market and of course this is also reflected in so many statistics of supply, demand and trade in our metals. China has been the world’s number one gold mining country for the past five years. On the buy side, we have seen the use of new gold in jewellery double in the past five years in spite of a gold price rise in the same period.

The relevance of China to the LBMA itself is reflected in another statistic: the number of Chinese refiners on the LBMA Good Delivery List continues to grow steadily at 22 and it now ranks just behind Japan, which has had 23 refiners for a number of years. The growth in the Chinese presence on our List has not happened by chance. The LBMA has been working with the Shanghai Gold Exchange (SGE) prior to the Exchange go live date. Our cooperation also extends to a number of former LBMA chairmen being asked to the sit on the SGE’s advisory board. The companies they then represented were also present in China, developing direct relationships with the regulators, banks and clients over the last 15 years.

These facts, along with many more, are a useful reminder of the LBMA’s influence, something I personally take pride in referring to when I occasionally meet my friend and former colleague at Natixis, Martin Abbott, who is now the CEO of the London Metal Exchange, as they are embarking on their own Hong Kong experience now that they are owned by Hong Kong Exchanges and Clearing.

Acknowledgements

We launched this event officially last night with a welcome reception. We were delighted that the Shanghai Futures Exchange and the Shanghai Gold Exchange offered to sponsor the reception and I would like to thank Chairman Wang Zhe and Chu Juehai for their combined hospitality.

Also alongside me here today are Peter Smith, Chairman of the London Platinum and Palladium Market, and Haywood Cheung, President of the Chinese Gold and Silver Exchange Society. I would like to thank them all for supporting us here this morning and over the next few days in Hong Kong. I offer particular thanks in advance to the Chinese Gold and Silver Exchange for sponsoring this evening’s event in the Convention Centre.

It is worth mentioning that choosing a timely date for this event that suits everyone is becoming almost impossible. We do realise that we could not have picked a worse time for an Indian delegate in that this is the Eve of Diwali. For this reason, I would like to thank the members of the Indian markets, who have given up such a precious time in their festive calendar.

Not only have we seen a large increase in conference attendees, through the Public Affairs Committee (PAC) of the LBMA we have increased the content by including delegate connectivity via the website in the eSocial initiative and also by adding a networking session, which was held around the pool yesterday afternoon. A feature of our conferences has always been the high number of you who attend and listen to the presentations, so, on your behalf, I would like to offer a very big thank you to the members of the PAC and the LPPM, all of the session chairmen and speakers who have worked diligently and responsibly to develop a programme that I am sure will give you new insights and stimulus.

Conference Expectations

Reasons for Attending

Some time ago I was asked if I was to attend this conference. A tad surprised, I answered, ‘I think my attendance is mandatory’. Of course, it is not compulsory for you, so why come? The view of the Peak is a compelling reason, to meet your peers, clients and suppliers, to understand what has been happening at the LBMA in the last year and, more importantly, what may happen in the next. There is no real single reason, probably all of the above. The dinners and the receptions are also an attraction. If the QE1 was still afloat, I guess this would have been the prime hospitality venue. It may not be here, but we will be bringing to the service the debate on QE2 and QE3 – the monetary acronyms, of course, and not the nautical ones. So what do we expect from this conference?

Gold Demand

Unlike previous conferences, as you have seen in the data that has just been given to you, we have had a certain amount of stagnation in the gold price over the past year. Lower physical demand – I think India is down some 43% and much lower volatility tells us that one of the biggest if not the most important upward driver from the US perspective, quantitative easing, must now be coming to an end, more so since QE3 only relates to mortgagebacked securities and not direct dollar devaluation. Gold prices have recently been supported by official sector buying. Will the gap between the amount of gold held in reserve by the developing markets and that of the developed world close? When comparing China to the US, it would seem that in China gold asset allocation can only go in one direction with just less than 2% of its reserves in the form of gold compared to the US at around 75%.

Whatever you think now may change when you listen to our speakers, one of whom speaks on the subject of optimising asset allocations, following which you will have the chance to share with us your updated views when we poll you on your forecast tomorrow at the end of the conference. I can tell you now that our own group of analysts has forecast the 2012 average gold price at 1766, against a current average of 1659, with René Hochreiter being the closest at the moment, at 1650.

Economics and Politics

When we met in Montreal, I mentioned that the LBMA wanted to be regarded as the competent authority for all things bullion. We have never had a greater opportunity to do this as we have today due to the recent changes in the economic and political environment. The platform has seen the Association become directly involved in shaping legislation not only in the US and Europe, but also in developing economies that want to use the Good Delivery List, the forward curve and our Responsible Gold Guidance.

I also mentioned two goals that the LBMA had set itself: firstly, to assist the World Gold Council in its quest to include gold as a level two asset within the Basel III framework and, secondly, to address the problem of conflict gold arising from the US DoddFrank Act. Whilst the Basel III debate continues, in the last year the LBMA has achieved the second goal, ensuring that our market can continue to function whilst operating in a responsible way. Our Responsible Gold Guidance has been developed thanks to the tireless efforts of our Deputy Chief Executive Ruth Crowell and the combined experience of the LBMA referees and members of the Regulatory Affairs and Physical Committees. This is a great achievement not only in terms of the guidance that we have produced, but in my opinion the LBMA has successfully influenced both the OECD and the SEC in the formulation of their rules on conflict gold. Our listed gold refiners will now subject themselves to an audit process that will ensure that their gold is conflictfree. It is likely in the future that other jurisdictions will follow the US to ensure that any gold is conflictfree.

In the coming year, the LBMA will continue developing its links not only with the industry but also with lawmakers, foreign trade associations and regulators. Following two regulatory forums in London this year, we intend to expand our activities to include more local forums and webinars as well as starting an educational suite aimed particularly at the needs of more junior members of staff in member companies.

Membership

Let me conclude with a word on our members. We have added another four members since last year. Our five referees are now members rather than associates and are ArgorHeraeus, Tanaka, Rand Refineries, PAMP and Metalor. We are now examining how we can further strengthen the due diligence criteria that members must meet so that we can maintain the highest level of integrity in the membership. A new working party has been set up to look at various ways of ensuring that the LBMA can build on its excellent reputation.

Conclusion

Next month, we will be celebrating our 25th anniversary. We are today a very different organisation from the one that was founded in 1987 and no doubt the next 25 years will see further dramatic changes, but I am confident that the LBMA will continue to serve its members, their customers and precious metals markets around the world. As always, our ears are open to listen to your views on how we maintain this service, but more importantly, improve it in this everchanging world.

For now, I wish you all a successful conference and by the end of tomorrow that you will have considered your time here in Hong Kong to have been very well spent. Ladies and gentlemen, thank you for your kind attention.

Welcome

Good morning, ladies, gentlemen and honoured guests. I am delighted that so many of you have come from the platinum group metals markets to be participants here today and that you have taken time out of your busy schedules to join us here at this joint LBMA/LPPM 2012 Precious Metals Conference here in Hong Kong for what should be an excellent opportunity to meet clients old and new. Our thanks go to the members of our management team subcommittee headed by Anne Dennison, who developed the platinum group metals topics and speakers, which we hope you will find interesting and stimulating.

Uncertain Environment

Today, we face a considerable degree of uncertainty with respect to both demand and price direction going forward. The simple fact is that the present economic uncertainty suggests that volatility levels will continue to provide challenges for all of us. For example, South African mines are experiencing labour unrest; what will that do for the metal coming out of the ground available for us? The current vehicle demand around the world has been somewhat patchy and the outlook continues to remain a little depressed, although we all hope for things to grow more quickly.

Trading and Settlement

The LPPM, as does the LBMA, strives to provide an effective framework for trading and settlement in our market and many of you will note that over the counter trading and clearing is now firmly on a Loco London basis. We are continuing our efforts to improve the Good Delivery standards through proactive monitoring of the platinum and palladium Good Delivery Refiners where our Physical Committee, chaired by Tim Pearce, is assisted by a very capable team of referees. Our market thrives on diversity of institutions, be they mines, refiners, fabricators, auto manufacturers, security shippers, oil companies, investors, brokers and, yes, even the commercial banks.

Conclusion

On behalf of the LPPM management team, I wish to thank you for coming, and trust that the presentations and meetings held throughout the conference with clients and counterparties prove to be both productive and worthwhile for you all. Please enjoy the conference, enjoy the hospitality Hong Kong has to offer and thank you all for coming.

Welcome

Good morning everybody. Mr David Gornall, Mr Stewart Murray, distinguished guests, ladies and gentlemen; on behalf of the Chinese Gold and Silver Exchange and the precious metals fraternity here in Hong Kong I welcome you all to the LBMA/LPPM Precious Metals Conference. This conference is now the premiere professional forum for the world’s bullion market. The LBMA, since its incorporation in 1987, has set the standard worldwide for gold and silver. On behalf of the Chinese Gold and Silver Exchange members, I must thank Mr Stewart Murray and his good team for choosing Hong Kong to be the venue this year, although I have been wondering why it took them 13 years to come. I think the team has done a very good job and I know that because my colleagues have been working with Ruth and her good team for over 10 months to make this event a success.

It is indeed my honour to be on this podium with the distinguished gentlemen next to me and it is also a great honour to be here representing the Chinese Gold and Silver Exchange as President during the conference, especially when it has attract a record attendance for any LBMA conference since its inception. This shows that Hong Kong still has great importance in the precious metals industry.

When I look at the audience, I can see that it is a very positive sign for the industry. Here today and tomorrow we have senior representatives and decision makers from all aspects of the industry: bullion traders, including banks and trading houses, refineries, fabricators, depositories, shippers, analysts, fund managers and private bankers. You have come from all over the globe to meet here to discuss the precious metals business and its future as well as, of course, to catch up with old friends in the business. The conference is perfect in this respect and it not only attracts good and professional speakers, but it is also a time when one can network, build up new relationships and contacts that can all lead to featuring and promoting the precious metals industry.

History

As I am sure most of you are aware, Hong Kong has always had an importance in precious metals markets, starting way back in the 1970s when the London houses, the Swiss banks, the German banks and the Americans all set up offices here. These were the glorious days of Hong Kong and, in fact, for a period the volume traded in Hong Kong was greater than that traded in New York. The traders used Loco London as the vehicle for arbitrage, trading in gold was done by the Chinese Gold and Silver Exchange. It was a physical market then; derivatives were far off and business boomed in precious metals.

The Future

In the near future, the Chinese Gold and Silver Exchange intends to work closely with the LBMA and its members to ensure that Hong Kong maintains and strengthens its position as the precious metal trading hub of Asia. Hong Kong is the gateway to China and I am sure we all are aware of how import a role China plays in the precious metals arena today.

Ladies and gentlemen, distinguished guests, please enjoy what our conference speakers have to share with us, enjoy the conference and, most of all, do enjoy your stay in Hong Kong. Thank you.

I. Introduction

Chairman Gornall, Chairman Smith, Mr Murray, Ladies and Gentlemen, good morning. I am honoured to be able to attend this annual meeting as a representative of the Shanghai Gold Exchange and to have entertained you during the welcome party last evening together with the Shanghai Futures Exchange. We are glad that we have the opportunity to receive you as a host of the gold industry in Hong Kong. The size of this year’s annual meeting and the number of participants are beyond our expectation; on the other hand, they also reflect the success and prosperity of this industry. Your cheerfulness and vigour remind me of the words of Shakespeare: “The golden age is before us, not behind us.” It is true that, as the global economy remains weak, the gold market is facing rare historic opportunities; however, ahead of all the opportunities and challenges, the issue of how to consolidate the existing achievements and gain a more extensive space for development has become an important topic for all the giants in the world gold industry. Therefore, we hope that we can take this opportunity to exchange and discuss with all our colleagues from different countries and learn from you. Together, we will draw the blueprint for our joint development in the market.

II. Shanghai Gold Exchange

As the most important professional conference in the industry, the annual meeting of the London Bullion Market Association is not only a platform for intellectual exchange for the global precious metals industry, but also a window for us to learn more about the world as well as for the world to learn about us. I still remember that I met Mr Murray for the first time when he came to Shanghai for the organisation of the annual meeting in 2004. I invited him to visit our gold exchange. At that time, the trading volume in our gold exchange was less than 1,000 tons and we had only one product category, gold. However, on the subsequent annual meeting held in Shanghai, Zhou Xiaochuan, President of the Central Bank, raised the requirements for three transformations, indicating the direction for the development of the domestic gold market.

III. Growth of the Chinese Gold Market

Since then, with the correct guidance and great support from the People’s Bank, the market has been developing continuously in its size, its diversified participating principals, and its influence and radiating effect. So far, the domestic gold market in China has an annual gold trading volume of nearly 10,000 tons, a silver trading volume of hundreds of thousands of tons and physical goods shipments of over 1,000 tons. Our exchange now has 167 domestic and foreign members, including commercial banks, commissioned enterprises and investment enterprises, more than 8,000 institutional clients and more than 3 million individual clients. The gold exchange has incorporated three major categories – gold, silver and platinum – into its business and has become a comprehensive precious metals exchange engaged in diversified businesses, including spot firm

offers, delayed offers, middle and long-term offers, personal physical investment, etc. It was also appraised by Mr Minglangmeide as a model in the global emerging market.

IV. Learning from Other Markets

The London Gold Market has a history of over 100 years and is an undisputed pioneer in the industry. In many aspects, we have to learn from this market and use it as our reference. I have personally visited London and the LBMA many times, making special inspections on the taxation systems, OTC enquiries and trade patterns, and borrowing and leasing markets in this market, and have gained great benefits. Therefore, I hope that both sides can further strengthen communications and conduct regular mutual visits in the future, promptly learning about each other’s developments and market trends, and providing a basis for future co-operation in warehouse deliveries, physical product recognition, product innovation, etc. This year is the 10th anniversary of the official opening of the Shanghai Gold Exchange, and we are perfectly aware that our developments in the past 10 years would not have happened without the assistance and support from all our domestic and foreign partners, especially from all participants of this meeting.

V. Further Developments in the Market

At this time, I would like to express our sincere gratitude to you again on behalf of the Shanghai Gold Exchange. I believe that, as the domestic market is getting more and more mature and open, the gold exchange will gradually launch more new products such as the listed OTC gold enquiry trades and gold ETF, etc. In addition, we will launch a Friday night market to further extend the trading hours, complete the market functions of gold leasing and borrowing, set up the gold delivery standard for the market in China and introduce more overseas institutions. After becoming an international member, we can become a positive leader in market development. In addition, I also hope that we can strengthen our co-operation with domestic and foreign peers to gain joint development and create a better future for the global gold market together.

VI. Conclusion

Finally, I would like to wish this annual meeting success and to wish all of you a good time in Hong Kong. At the same time, you are welcomed to Shanghai and our gold exchange. In Shanghai, you will see the magnificent scene on Huangpu River, which echoes with the grand seascape in Victoria Harbour. If you have ever watched the 007 movie, you may have already had an impression of the night scene in Shanghai. It is really beautiful. I am looking forward to your visit, and I will be waiting for you in Shanghai. Thank you.

I. Global Economic Uncertainties

Mr Gornall and Mr Smith, Ladies and Gentlemen, good morning. I am honoured that I can attend this world precious metal morning conference on behalf of the Shanghai Futures Exchange. As you know, the market is full of uncertainties at present, whether in Europe, America or Asia. The economic uncertainties generate a strong demand for precious metals as a means to avoid risk. The Shanghai Futures Exchange is quite honoured that we can provide services in this regard and support the market with special tools.

II. Shanghai Futures Exchange

Shanghai Futures launched gold futures in 2008 and silver futures this May. We should say, with support from the Chinese government and all present peers, we have made some achievements. So far, we have realised a total trading volume of RMB1,700 billion for gold and RMB1,450 billion for silver. This does not mean that the Shanghai Futures Exchange has already done an excellent job in this regard, but it is making an effort to further complete its services in Mainland China.

III. Future Goals

Now, I would like to tell all the entrepreneurs attending this meeting from all over the world that the next goal of the Shanghai Futures Exchange is to provide a platform with high efficiency, controllable risks and relatively lower costs for enterprises and investors around the world, so that all investors can participate in our market very conveniently. At this time, as a representative of the Shanghai Futures Exchange, I sincerely expect that the Shanghai Futures Exchange will be able to provide perfect services for you in all aspects. I would also like to wish this conference a big success and wish you all good health. Thank you.

Introduction

Good morning, ladies and gentlemen. It is my great pleasure to attend the LBMA annual conference. I still clearly remember that I met with Dr Stewart Murray and Mr Kevin Crisp and other LBMA friends last May in Beijing. It was a very pleasant and successful meeting during which we had a very deep and interesting discussion about the development of the gold market. Traditionally, Hong Kong has served as the Asian trading hub for gold in the past 30 years, so it is indeed a wise decision to have such a high-profile meeting here. Therefore, before I start my speech, I would like to take this opportunity to extend my warmest gratitude to LBMA for its kind invitation and to wish the conference a total success.

Three-transformations Strategy

1. Introduction

1. At the 2004 Shanghai conference, Governor Zhou Xiaochuan of PBOC proposed a threetransformations strategy, which led the way for the development of China’s gold market. Since that meeting, we have carried out a substantial amount of work to achieve such a goal. We have formed a market system with the solid foundation of the Shanghai Gold Exchange, spot and physical business complemented by Shanghai Futures Exchange’s gold futures business and the OTC business conducted by the domestic commercial banks.

1. The growth of the gold market played a very important role in the formation of the financial market system and the quick and sound boosting of the development of the country’s national economy. Today, I am very happy to give a brief history of the reform and development of our gold market over the past year, share our experience and mention some ideas about its future development.

1. First Transformation

In the first part of my speech, let me first introduce the gold market reform in China. According to our strategy and plan, the Chinese gold market will realise the three-transformations strategy gradually and we are happy to say that we have made significant progress in the past eight years. Firstly, we were quite successful in transforming our market from a commodity market to a financial market. The formation of the market system has been satisfied by the production demand of the domestic gold production and commercial enterprises. In 2011, China’s annual gold production reached 360 tons and you can see from the graph that our production has gradually increased. We have now held first place worldwide for five consecutive years. At the same time, China has become the largest gold consumption market with annual consumption reaching 361 tons. Gold has gradually entered into the common Chinese families’ investment portfolio. With the wealth and investment demand of Chinese people reaching a high level in recent years, in addition to the individual commercial banks and other financial institutions considering gold trading as an ideal, in our mind it is just the time to promote the gold investment business among institutions and individuals in our country.

In 2003, we cancelled the examination procedure for the production, fabrication, wholesale and supply of gold products and approved the retail gold business. At the same time, we encouraged SGE to attract more financial institutions to enter into the market and offered both spot and deferred contracts to the individual investor. Thus far, SGE has 33 financial members and more than three million individual clients. With increasing liquidity and more trading products, institutions could use this platform for the preservation and the increase in value of their assets by using gold investment tools.

Apart from the SGE, the domestic commercial banks have also played a very positive role in the transformation of the market. With their strong capital strength these banks have provided the investor with a lot of gold investment products, which have received huge popularity and the platform has become an important channel for Chinese citizens and corporations to be involved in the gold business. At present, more than 30 Chinese commercial banks conduct various gold investment business, which is of great significance in building and boosting the country’s gold investment market.

1. Second Transformation

We took effective measures to move from a spot market to a derivatives market. It is common knowledge that the development of the gold derivatives market could complement market function by improving risk variation, investment and financing ability. Those are very meaningful to the stable and healthy development of our country’s gold market. For this reason, we encouraged SGE to explore derivatives products as well as strengthening its spot market. In 2004, the Exchange successfully launched the deferred trading product, which became extremely popular. On the one hand, the introduction of the risk product provided market participants with the opportunity to avert risk. On the other hand, it also offered the investor financial tools to reach markets trading the variation. From 2008, gold deferred trading has accounted for over 60% of the SGE’s gold market and now this has risen to 33%. As you can see, deferred trading contracts have become the gold product of the Exchange and SGE has become the worldleading physical exchange for the trading of spot gold contracts. Last year, its gold trading value was over 6,000 tons with the physical gold shortage and the delivery value both exceeding 1,000 tons.

The futures market is the dominating part of the world gold market and China is no exception. On 9 January 2008, with the approval of CSRC, the Shanghai Futures Exchange launched the gold futures contract. In the following three years, the trading value of its futures contracts grew tremendously with the active participation of institutions and individual investors. With the successful listing of the futures contract, Shanghai has become the world’s fourthlargest gold futures market, just behind New York, Tokyo and Mumbai. Meanwhile, the domestic commercial banks have gradually offered gold forward, swap and options contracts to their customers, which is great progress in the Chinese gold market.

1. Third Transformation

Finally, we made an outstanding breakthrough in integrating with the international market. It is expected that in future the global market will be a 24hour continuously trading society, which is consistent with a traditional trading centre and the emerging market around the world. China’s gold market will certainly play an increasingly important role in this in the coming years. In this respect, our goal is to open to the outside world and become part of the world market.

One essential action was to prolong the trading hours by launching the night trading session, which was a proud moment in the Chinese financial market. SGE’s night trading session overlaps with the morning session in New York and the afternoon session in London, which is beneficial for the market. Since the official launch in November 2005, the trading value of the night session has increased dramatically year on year and now it accounts for almost onethird of SGE’s total trading value. It has obviously played an increasingly important role in our market.

The other important work is to introduce foreign market participants. In 2008, HSBC and three other foreign banks joined the SGE, one after another, as foreign bank members. To date, SGE has nine foreign bank members from the US, the UK, Canada, Australia, Switzerland and Singapore, with an annual trading volume exceeding 100 tons. In addition, we have granted a gold importation licence to another five domestic commercial banks, including the Bank of Communications, Shenzhen Development Bank and three others. The total number of Chinese banks that are permitted to import gold has now risen to nine, which has further broadened the channel of the gold business between the domestic and overseas markets.

To be honest, we have done a lot of the innovation work step by step, which was by no means an easy task, but we realise that we still have a long way to go.

Current Market Status

In the second part of my speech let me try to give you a picture of our market right now. Currently, the structure of the Chinese gold market consists of two exchanges, namely Shanghai Gold Exchange and Shanghai Futures Exchange and one OTC market dominated by the domestic commercial banks. The successful operation of the market in the past eight years indicates that such a pattern is a wise and logical choice and favours the stable and longterm development of our market. Frankly speaking, the healthy and prosperous development is the result of the free choice of market participants and the greater support of national policy. It has helped to create a fine and transparent market environment, which is why the demand for gold investment and consumption by different casts effectively controls the systemic risk and boosts the development of the gold industry. It is also worth mentioning that in the process of development our Government took effective measures to guarantee the smooth progress of the market.

We have also done two important things. The first is to prevent the reconstruction of gold trading centres. In recent years, a number of exchanges conducting the medium term and forward trading of gold have emerged in China. These exchanges were not under our regulatory system and lacked internal management, which brought enormous risk into the market. Therefore, the State Council, the PBOC and other ministries jointly issued a paper in December 2011 announcing that any other exchanges except the SGE and the SFE were not allowed to organise as gold traders or conduct gold business.

The next piece of work is to eliminate the illegal market while guiding investors to trade in the legitimate platforms. In recent years, the dramatic move in gold prices has led to a surge in domestic gold investment demand. As a result, a lot of gold investment companies have emerged and conducted leveraged trading, which used to oversee futures contracts as the underlying asset. This trading is margin trading over illegal platforms, which is very risky. For this reason, the Chinese Government continues to fight the underground market, safeguarding the market environment, the production and the legitimate rights and interests of investors. On the other hand, the Government encourages the Shanghai Gold Exchange and the Shanghai Futures Exchange in developing new investment products.

Future Developments

In the last part of my speech let me discuss the future development of China’s gold market. We started the market reform a decade ago. Looking into the future, we have full confidence to grab the opportunity and are ready for new challenges. It is worthwhile thinking about how we could innovate ourselves and sustain the continuous growth of our market. We are seeking cooperation with the international market for mutual benefit and would like to propose the following ideas.

The first is to ensure the development orientation of the market. In the future, we will establish a more mature market system and promote product innovation, so as to gradually satisfy the growing demand in our market and fully function in serving the country’s real economy.

The second area is to perfect the laws, rules and relative policies. Perfecting the laws, rules and regulations are the basis of the market’s development. Recently, the regulator issued a series of rules and regulations to promote the health and development of our market according to the general planning of the gold market. Next, we will continue to urge for the implementation of the existing regulations and keep doing research on the legal environment due to the changing climate. We believe that the future development of our market will be truly guaranteed with a great leap in the construction of the legal system.

The third area is to perfect the mechanism of risk aversion and investor protection. Gold is a contributor of both gold and financial assets, connecting both in the Futures Exchange and OTC market with a lot of participants in China. This brings difficulties and challenges to the regulator. We understand it is not only Chinese practice but worldwide action in tightening the supervision of the OTC market. Consequently, a number of new regulations have come into existence all over the world, among which the DoddFrank Act is the most influential and powerful. Nowadays, the OTC gold market in China is developing rapidly with a lot of new business, including the sale and repurchase of physical gold and going forward contracts. We will carefully study this for the sake of the investors and the strengthening of market risk management, so as to pursue a stable and healthy market environment.

The fourth area is to strengthen the market system construction and accelerate the pace of production innovation. With the rapid growth of the market, the participants have a strong desire and demand for community trading and risk engines and are eager to use new trading products. In this respect, SGE should take the initiative to do intensive studies and thorough research. Currently, SGE is undertaking a project for a price quoting system. Once the platform is built, the Exchange could combine its trading model of price bidding and quoting to support the domestic gold market and to attract more investors into the market to satisfy the trading need. In addition, we are planning to form an efficient gold leasing and lending market and support commercial banks’ business in this field. The gold leasing market is aimed at attracting more foreign players and investors to join so as to facilitate and mobilise domestic physical gold, increase market liquidity and improve market function, efficiency and competitiveness.

The final area is to promote further market opening to the outside world. The gold market is a global one and we are definitely part of it. In recent years, China has introduced some influential foreign banks. The involvement of foreign banks’ gold business in SGE has helped to enrich the investor structure and broaden the channel of the domestic and overseas market. However, to us, it is just the beginning and the first step of our internationalisation strategy. Later on, we will further open up the market and quicken our step towards integrating into the international market. We should actively create a foundation for this gold market to become an important part of the international gold market.

Conclusion

As an emerging market, we relish the expansion and enjoy the greater potential. In the future, we will further enhance market competitiveness and support product innovation, enrich the variety of the trading model and promote the functioning of the market. With this effort and the support from home and abroad, we believe that our market will play an increasingly important role in serving the development of the national economy and we are devoted to making a new contribution for the prosperity of the global gold market.

That is all. Thank you very much indeed.

Preamble

Good morning, ladies and gentlemen. After my close friend Xie Duo’s speech, I do not know how much value add I can provide for this conference and also, because of the time constraint, I do not want to sacrifice your coffee break. Therefore, I think I will have to delete some of my slides and speak rather quickly.

Global Financial Crisis

The first thing for me to ask is what is the nature of this global financial crisis and how long is it going to last? In the beginning, I was rather optimistic. I thought this was the usual global crisis and it would recover soon and so on. Then I found that that was not true. This time, the crisis is different because the nature of this global financial crisis is very different from previous ones. That is, the fundamental cause of this global financial crisis is that it is a debt crisis, because the wealthy countries spent too much and borrowed too much.

From the figure on this slide you can see that before the subprime crisis US total debt to GDP was more than 370%, which is a huge number. Before 2007, among economists, we were debating what would cause a global economic crisis and we paid attention to the 17% of external debt. In other words, the US accumulated large foreign debt. Foreign debt as a percentage of GDP was 17% and we worried that there would be a sudden stop, the dollar interest rate would rise and then an economic crisis would occur. However, this did not happen and we made that mistake because we failed to see the broader picture, which was 270% and household debt to GDP was roughly 100%. We just took notice of the 17% and forgot the 100%. I think this was where we made a big mistake. The subprime crisis translated to a public debt crisis and I do not know how Obama can hang on to this cliff and now the US public debt to GDP ratio is something like 115%, which is the highest since the Second World War.

Economic Recovery

1. Historical Methods

This is the basic situation we are facing and now the question is how the United States and many other countries will be able to solve this problem. Without lowering the debt to GDP ratio to a sustainable level there will be no real economic recovery. I think we have to accept this fact. Throughout history, debt to GDP ratio has been reduced by economic growth, fiscal austerity, default, inflation.

I do not think there is any other choice but to adopt one of these methods to reduce the debt to GDP ratio, then we can talk about economic recovery. In fact, the US owes a huge amount of foreign debt, so dollar devaluation will be a very important option for the Federal Reserve.

1. Quantitative Easing

Now we have socalled ‘quantitative easing’ (QE), which I think has the following objectives:

• To drive investors away from Treasury bills, because this is very safe asset and then the investor has to buy other financial assets, so you drive up share prices, gold prices and many other prices. Hence the effect will be some positive impact on economic growth. I think this is the rationale in the mind of Ben Bernanke.

• To create inflation. Before taking over in this Presidency, I think Bernanke was very open in talking about the possibility of using inflation to solve the debt problem. He gained the very good nickname ‘Helicopter Ben’ and I think he will continue to do so, but of course he will not say so openly.
• To push down the value of the dollar is another very important objective of QE, even though he refused to accept that this is the policy, but I think Greenspan is rather open, because he is no longer the governor. He said that one of the most important purposes of QE is to drive down US dollars. I think this is a very important way for the United States to solve its problems.

Essentially, the policy of QE is to shift the debt burden away from borrowers at the expense of creditors and I think this is basically the situation that China is facing.

China

1. External Environment

China is facing quite a difficult external situation; firstly, because of the global recession and global moderation, China’s external demand has weakened. For many years China’s economy has depended on its exports, even though it is an exaggeration to say China’s growth is entirely dependent on external demand. That is totally wrong, but I have to admit that exports is the most important growth engine for the Chinese economy, because in order to solve the debt problem I think the only option for the United States is to run a trade surplus. Therefore, the pressure on China will be very great to allow the RMB to appreciate, even though China’s current account surplus to GDP ratio is not that high; it is more or less balanced, but still I believe the pressure will be on China. Therefore, China will continue to suffer from capital losses due to US treasuries’ negative real returns. I think US treasuries’ 10year yield is 1.60something points; it is very, very low and US inflation is more than 2%, so the real return for Chinese investment in US treasuries is negative. In addition, the US will try its best to inflate away its debt burden, so China will suffer. Furthermore, China’s assets are mainly denominated in US dollars, so devaluation will maybe suffer greater losses.

1. Losses

In fact, China has suffered great losses. Over the past two or three decades, China has accumulated something like $5 trillion in foreign assets. It has also accumulated something like $3 trillion in foreign liabilities. China is credited with something like $2 trillion, but for most of the past 10 years China has had to pay investment income to other countries. Last year, China’s investment income was negative $27 billion. I am a lender, so I lend money to you. Instead of collecting a return from you, I pay interest to you. That is quite ridiculous, but that is the reality that China is now facing.

1. Challenges

China is facing lots of challenges, but a very big one is that, on one hand, China has to maintain a decent growth rate, because without a decent growth rate there will be employment problems, social instability and so on and so forth. On the other hand, we cannot rely on exports to promote growth. We cannot rely on running a current account surplus to promote economic growth, because of the global financial crisis, so how China can defend its interests and reduce capital losses is a very big challenge. My personal view is that in order to get rid of a devaluing US dollar and US assets, China should run a current account surplus – there is a typo on the slide. I have written ‘current account surplus’ because we used to talk about the current account surplus and when I am thinking about the current account deficit I still say ‘current account surplus’, which is a very bad habit.

1. ShortRun Growth Prospect

Earlier this year, most Chinese economists predicted that by the end of this year we would see a growth rate of at least 8%, but until very recently Chinese economic performance was not that satisfactory. I think there are three reasons for why this happened.

Firstly, starting last year, the Chinese Government adopted a very tight monetary and fiscal policy, trying to slow down the growth of real estate development. The investment in real estate development is very important for China’s economic goals and we underestimated the impact of the slowdown of investment in real estate on China’s economic goals.

We also did not expect that the situation in Europe would be so bad. We thought the European countries would be able to overcome their difficulties and have a better economic performance, but we were wrong.

Thirdly, and I think this is very important, until quite recently the Chinese Government did not rush to use expansionary monetary and fiscal policies to stimulate the economy. In 2008 and 2009, there was a slowdown and the Chinese Government panicked a little and rushed to introduce a few stimulus packages. This year, I think the Chinese Government is more cautious and more relaxed, which I think is a good thing. They have not panicked and so have not, until recently, introduced a more expansionary fiscal and monetary policy. I think this is a very important reason why, so far, the growth performance of the Chinese economy is not a good as we expected earlier this year, but it does not matter.

1. The Talk of the Town

Late last year and early this year, people talked about a hard landing, especially my good friend Roubini. I think there are three reasons why foreign pundits are talking about a hard landing:

• China’s overinvestment.
• The low loan quality of China’s banking system.
• The property bubble and the possible crash of the housing market.

I think all these arguments are reasonable, but more or less they exaggerate the extent of the seriousness of these problems. Yes, we have these problems, but they are not that serious. In fact, we have faced these problems many times in the 1980s, 1990s and 2000s. Indeed, in the 1980s and 1990s I predicted the fall of the Chinese economy many times due to all these problems and each time I was wrong. Since then, I have become cleverer, I have tried my best to be optimistic and I have been right. I have shifted my position, so I hope you can follow suit. Do not follow the pessimistic forecasting of the Chinese economy, because China is a big country and the situation is complicated.

1. Loan Quality of the Banking System

People talk about the loan quality and I think this is the real problem. Even though I am optimistic, we should not be complacent. We should take care of this problem. In fact, there are a lot of problems; for example, the local government financial platform and big project finance. For instance, we have built a very good, high speed railway, but the borrowing by the Ministry of Railways is huge, accounting for something like 4.3% of GDP. How this Ministry can repay the money we do not know, but China will be able to muddle through, do not worry about that.

The key thing for me is that China’s fiscal position is very good and you should focus on the fiscal position when you are analysing a country’s situation. If a country’s fiscal position is bad then the situation is hopeless, but in China the budget deficit to GDP ratio is less than 2%. The public debt to GDP ratio is less than 20%. This is good enough and means that we still have room to manoeuvre. Even though there is a crash of this and that, we can foot the bill and survive. Of course, we cannot make too many mistakes. You can crash once, twice, three times, but perhaps three times is enough. If the public debt to GDP ratio shoots up to more than 100% or 200% the Chinese economy will be finished, but we are far away from that perspective, so there is no need for you to worry.

1. Housing Market

I gave a presentation earlier this year at the New York Stock Exchange where I said that the real demand for houses will still be strong after the withdrawal of speculative demand; a floor for housing prices will be set. The quality of mortgages is quite good in China and the banks are in a position to absorb a large impact even if there is a crash. The real issue for China’s housing market is not a bubble. China is a very big country and maybe in Shanghai there is a bubble, but you cannot say that the whole Chinese economy is suffering from a housing bubble; that is totally wrong. The issue for China is resource allocation, which I will talk about a little bit later.

1. Growth Rate Slowdown

For me, a bit of a slowdown is a good thing and we should not really worry about it, rather we should be happy with it, because the priority for the Chinese Government should be to transform China’s growth pattern from being investmentdriven, exportdriven to a more sustainable and sustained growth pattern. Therefore, China should focus on shifting the growth paradigm. Growth is important, but we should not pursue a very high growth rate and so 9% for me is too high. In order to reallocate resources and make better use of them, you should allow the growth rate to be slower. I will give you an example: China’s real estate investment to GDP ratio is 10%. In history, no country has had such a high percentage of investment in real estate development. If you take Japan or Korea, once upon a time they were at 8% for a few years, but no country like China. You cannot base your growth on simmer and stew.

Another example is we talk about affordable housing in Beijing. The standard for an affordable house is 90 square metres. In Hong Kong, on average, it is 4749 square metres. China is still a developing country with an income of something like $5,000, building affordable housing of 90 square metres in Beijing is ridiculous.

Do you know how many steel mills there are in China? My guess is more than 1,000. We produce more than 48% of the world’s steel products. Japan ranks second with 8%. China has no comparative advantage in producing steel. This is very good news for Australians. My view is that China should cut the number of steel mills and reduce steel production. I am sorry for our Australian friends, but we have to do so and hence the slowdown is inevitable.

1. Is the Government Unnerved?

For a long time the Chinese Government was not unnerved, but later on I think it lost its nerve a little and ushered in a more expansionist fiscal and monetary policy. Due to time constraints today, I will not elaborate.

1. Staying the Course

I think that China should stay the course and stay calm, while not barring fine tuning. I think the policy was very clear many years ago. According to Premier Wen Jiabao, China’s growth pattern was not sustainable, not coordinated, not balanced, so we have to shift our growth pattern and in order to do so we should allow the growth rate to be slower. It is affordable: for many years we talked about 9% because we thought otherwise there would be huge unemployment, but unemployment is not a big deal. In fact, labour shortage is the very big deal, which shows that there is room for the Chinese Government to make a slow descent but with better growth rather than very rapid growth. This is desirable, because you have a tighter economic situation, so you force enterprise to have more competition and more incentive for upgrading their industrial structure and cultivate innovation, creation and so on. So a bit of a slowdown is a good thing and we should not worry too much about it.

1. Progress in Structural Adjustment

China has made some progress in structural adjustment and there is a list on this slide, but due to time constraints I will not elaborate on it.

1. Growth this Year

Earlier this year, when I talked about China’s growth, I said it would be okay and there would be no hard landing. In fact, I was being quite courageous. Now when I talk about it, everybody agrees that the Chinese economy this year will be okay. My bet is that the growth rate will be 78% and I do not think I will be too wrong, because the Chinese economy has already bottomed out over this short period of time and also — maybe this has something to do with our Party Congress — the Chinese Government does not want to see a slowdown in the growth rate and they have tremendous means and ability if they want to maintain a growth rate of 8% or higher. If they wish, they can do that even with just one quarter left, so 78% perhaps is the right prediction. According to our calculations a few months ago, we saw sequential monthly growth rate already picking up in August. Anyway, China’s development since last March is quite good and I do not think I need to talk about this anymore.

1. Rebalancing

China’s current account surplus to GDP ratio has been falling quite rapidly. By the end of last year it was 2.8%, much better than Germany, so if the United States wants to attack somebody, attack Germany, do not attack China. Thank God Romney was not elected, not because I fear Romney, I have great sympathy with him and I have sympathy with some Republican ideas. I thank God he was not elected because he does not need to try to figure out how to achieve China’s currency manipulation. China is not, so he would have had very hard work to do and now he can just relax.

The factors contributing to the rebalancing are very simple:

• Worsening of the external environment.
• Worsening terms of trade.
• Domestic stimulus package – we use this a little bit and whenever we do China’s current account surplus is reduced.
• 30% real RMB appreciation, which is not nothing.

A big issue is whether this rebalancing is cyclical or structural. The World Bank said that China’s rebalancing was not real rebalancing, but cyclical. I disagree, even though usually I am sympathetic with many of their opinions. I think this is fundamental change and not just cyclical. Of course, there are elements that are cyclical, so the safest statement about this is that it is both cyclical and structural, but perhaps more structural than cyclical. I do not think China’s current account surplus will rebound strongly in the next few years.

This rebalancing is bad news for you guys, because China’s importation of precious metal and mineral products has reduced. The figure for August shows a double digit fall in prices relating to energy, precious metal and mineral products, so in future I think China will reduce these kinds of imports because it needs to readjust its economic structure. The Chinese economy will be less heavy, which is not very good news for our trade and maybe not very good news for Brazil and other countries, but I think perhaps you should be prepared.

1. RMB Trends

I think there is still room for the RMB to appreciate, but that room is not very big. You should not expect the RMB to shoot up in a big way. I think that PBOC may further reduce intervention in the foreign exchange market, but I may be wrong and Mr Xie Duo can correct me, but this is my view and I think it is a very good thing. However, the PBOC will deny that there is any RMB internationalisation, there is just RMB settlement for imports and exports, but this is the same. I think because of this new policy and to a very large extent China has opened the shortrun crossborder capital flows. This is perhaps good news for you, but not good news for me, because I think China’s financial system is still fragile and we must be cautious and also because the US is trying to inflate away its debt burden and trying to devalue the US dollar. Therefore, crossborder capital flows will become very large and frequent and if you open up your capital account China will face lots of shocks, which may be a good thing, because the shocks will provide the incentive to speed up reform of the financial market. However, as an economist, you cannot say anything definite, just ‘yes’ and ‘no’, which is very safe.

Conclusion

Let me conclude very quickly by saying that the fundamental cause of the global financial crisis is the overindebtedness of developed countries. Global deleveraging is the only solution for the global financial crisis. The deleveraging will take a long time and so will the recovery of global growth. For the United States, export growth holds the key to recovery; this is very important. To achieve export growth, the US dollar has to be further devalued, which in turn depends on the Federal Reserve’s monetary policy. Therefore, there will be more QE, there will be devaluation of the US dollar and there will be more exports. I think that is good, because only by running a current account deficit can the US repay its foreign debt. On the other hand, by China and many other countries running current account deficits, not surpluses, they will get their money back; otherwise they will continue to pile up IOUs, which is stupid.

2012 is a difficult year for China, but there will be no hard landing. The Government will and can prevent a hard landing from happening. The true danger lies in the mediumterm, in my view. In the short run, three years, five years, no problem, but in the longer run, it depends. The Chinese Government has to strike a balance between rebalancing the economy and maintaining a slower but still decent growth rate of 7%. This target was set in the fiveyear plan, but unfortunately we never pay attention to those kinds of plans. A big danger is that the fear of slowdown leads to rolling back the measures aimed at readjustment. The longer the delay in restructuring and rebalancing, the higher the cost will be, as we can imagine. If we start RMB appreciation in 2013 or we appreciate in a determined way in 2015, China’s accumulation of foreign exchange reserves will be much less and China’s capital losses will be much less. China’s foreign exchange amount, I think, is 500 billion. If we postpone adjustment and the RMB fails to appreciate, we will continue to accumulate a surplus and in a few years China has 2.3 trillion, which is a huge increase.

Certainly the slowdown is not painless. The Chinese Government has to deal with numerous social and economic contradictions head on. These situations should not be avoided. You cannot buy stability. You have to promote people to do hard work, to strive for stability. Many of the contradictions will surface and resurface as a result of the slowdown of economic growth. Whenever there is a slowdown in growth lots of problems appear. Therefore, for us, in order to keep stability we need high growth, but the key thing is whether the high growth is sustainable.

In my view, China has entered a new period of adjustment and a paradigm shift, which may last for a few years, maybe five years or longer. During this period, the Chinese economy will grow at a range of 78%. It is still quite high, but I think 7% should be okay. Thereafter, the growth rate will pick up again and eventually lift China up to the plateau of a high income country.

Thank you.