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Gold has always had its place in many investor portfolios seen as a sef bet carrying intrinsic value. But the precious metal frequently returns to the spotlight in times of financial turmoil. In our latest BizChina 360 series, we look at gold China, its fledgling market, its production, and investment.

Our first installment, we look at dramatic developments over the last 8 years.

In 2007 China became the largest gold production country in the world-toppling South Africa from a position it had heldfor over a hundred years.

It’s an exciting new century for China’s gold market. That’s because in 2007, China became the largest gold production country in the world-toppling South Africa from a position it had held for over a hundred years. China’s gold consumption also grew multifold, and now ranks 2nd globally. And experts such as precious metals consultancy GFMS limited are confident, that the positive trend will only continue.

Philip Klapwijk, Executive Chairman of GFMS Ltd. said “The China market in 2008 will probably be the world’s largest physical gold market, supply, demand, consumption. China will be the world’s largest gold market in 2008; that tells you the significance of the China market.”What may be even more startling is the fact that it has taken less than a decade for the country to get here. Previously, gold was managed under the old system of “unified purchase and allocation”, and was strictly controlled by the central government. The development of the gold market was stagnant, at best.

But 2000 proved to be a pivotal year. Everyone in the gold industry hailed the Chinese government’s move to include opening up the country’s gold market in its 10th five year plan. The basic goal was to gradually loosen control of the market by establishing a new system for gold production, circulation and healthy consumption through market dynamics.

Gu Wenshuo, General Manager of General Office of Shanghai Gold Exchange said “The reform of the gold market was very critical. That’s because gold represented not only a commodity, but also a financial function. It was also related to the country’s gold reserve, and many other issues. As a result, China focused on reforming its gold management system. Under those circumstances, we did thorough investigation of the market conditions, and learned from the experience of other countries. On such basis, the State Council ratified the People’s Bank of China to establish a gold market to adjust gold resources.”So at the turn of the millennium over 20 years after China began to shift towards a market economy, the country finally launched its market reform for the gold industry.

The first step was establishing the Shanghai Gold Exchange, which formally opened for trade in October 2002. For the first time in China’s modern history, the country’s gold price was fully determined by the open market.

Enterprises were no longer confined with limited volume. They were free to buy or sell gold through the exchange, and at a price that was determined by the supply and demand of the precious metal.

The opening up of the market injected vigor into China’s gold industry, and significantly boosted development of mining, manufacturing and investment, and many other aspects. But there was a catch. In the early days, the Shanghai Gold Exchange was offering only spot transactions. As a result, most of the market players were gold miners, jewelry merchants, and other entities engaged in the gold industry. Gold investments such as gold future products were not available. In contrast, 97 percent of the worldwide gold trade was gold futures. So-that led to more development. “But it was not until 2004 before the country came out with more clear guidelines to develop the gold market. Speaking at an international gold summit that year, China’s central bank governor Zhou Xiaochuan spelt out 3 targets for the sector, applauded by many industry insiders.

Liu Yuning, Senior Vice President of Jingyi Gold Co., Ltd. said “The central bank governor Zhou Xiaochuan said the yellow medal should evolve from a solely consumable to investment product, while its trading should change from spot transactions to gold derivatives and move from domestic markets to overseas. From 2003 to 2008, we can see gold transforming into an investment product. When we talk about gold, many will now not only think about gold jewelry, but paper gold and gold trading at the exchange.”For the second target, there have been a lot of changes undertaken through years. After research and preparation, the Shanghai Gold Exchange first launched T+D products in 2004, (which allow investors to bid first but delay the spot transaction of real gold), as a stop-gap to gold futures. The breakthrough came in January 2008, when the Chinese Securities Regulatory Commission ratified the Shanghai Futures Exchange to launch gold futures products.

Li Wenfeng, Trader of Huaxia Bank said “The move has significant meaning. China ranks among top gold producers, but has little impact on gold prices. The launch of gold future is an important complement to China’s financial system. If we further relax controls on gold import and export, we will have more say in pricing the precious metal. Gold future is a good start. For individual and corporate investors, it is a new alternative.”Another important step has been combining the domestic market with the global gold market. The People’s Bank of China gave the Shanghai Stock Exchange the go-ahead to include 5 locally incorporated foreign banks in its membership this June. The Standard Chartered made a Chinese-style debut on August 8th by trading 88 kilogram gold at the Shanghai stock exchange. It hoped the 4 “8″s will bring luck to its future development in China’s commodity markets.

And with current economic climate in such a turmoil, gold has never looked better.

Wang Lixin, GM of World Gold Council of Greater China said “With the increased income level of the population, with more mature of the gold market, with more products availability in the market place, in terms of the unstable financial market and a weaker US dollar, maybe some concerns about the global currency. We believe consumer will have the interest to buy gold.”"I am now at the People’s Bank of China, which serves as the only management of China’s gold system. However, it has now taken off from here to evolve into a very robust market. Many would say recent developments in China’s gold market has been staggering. People may ask how has this happened so quickly? Many credit the country’s macro-economic environment: China’s opening-up policy. The question now is, can it be sustained? Even though experts are bullish about the country’s future gold industry, China’s increased integration with the global economy does make it vulnerable to its highs-and its lows. But the fact that more and more people are turning to gold as an investment channel could spell an even brighter future for China’s gold industry. “

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