ON THE CONSTRUCTION OF EFFECTIVE GOLD MARKET IN CHINA

Progress of China's Gold Circulation System Restructuring

In order to effectively promote the gold circulation system restructuring, at the end of last year, the State Council set up a gold system restructuring leading group headed by the People's Bank of China, with the participation of Ministries and Commissions concerned. The group is responsible for the programming and coordinating of the gold circulation system restructuring.

Shortcomings of the Opening-up Programme of China's Gold Market

According to the market theories, there must be four basic functions for an effective market: reducing trading cost to the minimum, price discovery, averting and dispersing market risk, and relatively high liquidity.

BIS still classifies gold to acceptable international clearing instrument. Its commodity attribute requires marketalizational transaction, while its money attribute determines that it is a kind of international reserve, and the supervision on its market circulation should adapt to the money standard system and foreign exchange management system of a country.

The complexity of market transaction directly determines the complexity of the market system and supervision system. Owing to the peculiarity of gold, the gold market needs careful programming and strict supervision.

There are some distinct shortcomings in the programming of China's gold market:

*Single specification of product can only satisfy the needs of gold wholesalers, but not the purchase(investment) need of small-sized retailers, especially natural persons.

*There’s no gold derivative products that can satisfy the arbitrage need of gold producers, such as gold option, gold futures, gold forward, and gold SWAP etc.

*Slow development of gold retail market.

Suggestions on the Improvement of China's Gold Market System

*To develop simultaneously the two layers of market: wholesale and retail.

*The People's Bank of China selects two to three commercial banks to develop arbitrage business and allow them a certain forex quota. As long as the supervision is strengthened, there will be no overwhelming influence on the foreign reserves.

*Before the operation of Gold Exchange, commercial banks should be given the right to import and export gold and matching policies of forex buying and selling, taking advantage of its superiority to function in the "dock" of domestic and international gold market.

(By Lei Yin)