THE FOUNDATION AND DEVELOPMENTOF CHINA’S GOLD MARKET

SGE officially opened on October 30,2002, which meant great achievement of China's gold market management system reform. It is also a symbol that we are striding forward to the standardized market gradually.

Market performance

Generally speaking, the whole operational conditions are quite steadily with the smooth operation of the trading system and continuously increasing trading volumes. SGE launched the platinum on July 30, 2003, AuT+5 on February 18, 2004 and trial business for small-scaled gold bars on June 28, 2004. On August 16, 2004, the new version of trading system was officially put into operation and meanwhile deferred trading transaction was introduced. Up to August 31,2004, the accumulated trading volume had reached 363.76 tonnes with a turnover of 368.61 billion yuan. Follows are the main characteristics of the market.

Continuous expansion of market scales, the evident enhancement of investment ratio and the full display of allocation functions to the market resource

From January 1 to August 31, the total trading volume was 170.043 tonnes, up 36.53% year-to-year, and the turnover reached 182.47 billion yuan, up 57.04% year-to-year. On June 25 this year, the daily trading volume broke through record high 6 tonnes. The transaction between the gold producers and users show there exist quite good connections between the supply and demand. After the People's Bank of China (PBC) had abolished the monopolizations on the gold allocation and management, SGE played the role of allocation and management on the gold resource, accelerating the healthy and orderly development for the gold producing, circulation and consumption.

From the January 1 to August 31 this year, the delivery amount was 105 tonnes, with the delivery ratio reached 61.76%, down 5.52% year-to-year. There is an evident increase of the investment business, which has become the main force to enlarge the trading volumes.

Improvement of price discovery function and gradual formation of price-fixed mechanism; gold price in SGE dominant in the domestic gold market

In the first half of this year, the international gold prices were quite fluctuated and the domestic gold prices kept close pace with or were often higher than those on the international markets on the whole. Among those 123 transaction days, there were 86 days that our prices are higher than the prices on the international markets, the average spread reached 0.68yuan/g. On the other 37 days, gold prices on SGE are lower with the price difference of 0.32yuan/g. Now the transaction gold price on SGE has become the reference benchmark for the gold producers, users and some investors, directing their operational activities and residents' consumption.

Increase of trading varieties and the market functionality

In the first half of this year, SGE respectively launched the AuT+5 and Au50g in February and June. The market not only acts the function of allocating the gold resource but also improves the investment functions, which could be proved by the increase of market participants and the enrichment of profit-making models. Currently, SGE has 128 members. According to the statistics, these members account for the 75% of the China's total gold production, 80% gold consumption and 90% refining capabilities.

Our two years' operation witnessed that the project design is in accordance with the market requirement of development and the further appearance of the basic market function. On the whole we have reached the pre-set objective of management system reforms on the domestic gold market, realizing the smooth transition for gold from the monopolization to market trading and achieving periodic success of this revolution.

Some plans on the development of SGE

Now we are only at the first stage of the development, PBC, the whole society and the counterparts in the international gold fields have laid their big expectations on us as well as offered great supports and created a good external environment for us. Earlier this year on the working conference of PBC for 2004, Governor Zhou Xiaochuan made requirements on China's gold markets. He required "by making further development of the gold market, creating safety and high efficiency gold trading system and exploring the new trading varieties with investment and hedging functions, China's gold market should fulfill the transition from present spot market to a comprehensive financial market." In addition, Governor Zhou gave important instructions on strengthening our management, controlling the risks and meeting the needs of the market while making inspection this April. Under the guidance of PBC, we will conduct followed methods gradually and strategically on the basis of the study and research on the successful experience of international markets and China's situations closely.

Set up a safety and high-efficient gold trading system to ensure the development of SGE

Setting up a safety, efficient and high-capability trading system which could fully adapt to the development of trading business is a key point to the steady operation and sustainable development of us. To meet the further demands from the market, SGE started to probe into the development of new trading system. In the periods of brewing, projecting, designing and developing, we had organized the specialists on technology and business for many times to demonstrate it strictly, met with our members widely and consulted with the international specialists seriously. The objective is that the new trading system should be with advanced technology, high information, steady capability, compatibility and strong loading ability. Thus this new trading system can meet the needs of sustainable development of business at maximum levels, with the characteristics of flexibility, retractility and transferability. Now the peak level of application system could support 1000 quotation per second and 3 million customers at the same time. Besides maintaining the current business, this new trading system can also support the spot, forward, deferred even futures trading methods.

After continuous developing and testing which lasted for almost a year, the new trading system came into operation on the August 16 this year. Now the new version of trading system operates well with the steady host computers and smooth trading net. Through the simulative testing and practical operation, our members have had good commands of the business flows for the new trading system. It's no doubt that the setting up of new trading system will provide us with a broad business platform.

Developing the new trading varieties with hedging functions on the gold market to meet the needs from various investors

Since the debut of SGE, we could meet the consumption needs from the gold producers and consumers, but we should enhance the investment functions of the whole market. According to statistics, China's residents deposits are as high as 12,000 billion yuan. If we introduce the individual gold investment, the monetary assets on the hands of the residents may be turned into the gold assets. Keeping the gold among the residents can relieve the country's heavy pressure on the FX and money market and take back some money is a favorable act that do good to our country as well as the residents. Meanwhile, gold has the duple attributions as general commodity and monetary commodity. As the research hold by related department, it showed that 20% of the informants would like to participate in the gold investments and the prefer to invest their 10%-30% financial assets into the gold markets. Using the above mentioned 20% the participants and 15% financial assets as the reference base, we expected there will be about 300 billion yuan flowing into the gold market after the wholly open of the domestic gold market, which means a huge market potential.

On June 28 this year, SGE introduced the small-scaled gold bars on the trial basis. These 50g gold bars have lowered the transaction entrance standard and enlarge the scope of trading participants, actively pushing the investment functions on the markets. At the same time, by listing the new product we can accumulate the experience and make full preparations for the entrance of individual investors. Under the supervisions of PBC and the related government departments, we will further standardize the market and introduce the individual investors into our market system to ensure the steady development of economic constructions.

To improve the exertion of the market functions and gradually realize the transition to the financial markets from current spot physical markets

To improve the market functionalities, SGE continually strengthens its product innovation. Now we have launched the T+5 and deferred trading methods on the basis of spot trading which could meet the needs of locking cost and maintaining the value to hedge the cost uncertainty due to the price fluctuation.

Current trial deferred transaction is conducted in the installment methods. The traders can choose to deliver before, on or after the contract day through the negotiation between the bidder and asker and the contract price is the matching price of the day.

We balance the supply and demand on the market by adjusting the deferred compensation that charged for deferred traders. We also regulate the margin ratio to ensure the smooth trading. Meanwhile, we prevent and control the risks by strictly executing the effective regulation rules.

At present stage, we have launched the deferred trading in the domain of spot transactions in order to gain the experience. After the basic frame of financial product trading system with the investment and hedging functions had come into being preliminarily, we will fully take our advantages and absorb the advanced international experience to probe into the financial products as futures and options foreseeingly, diversifing trading products. We should not only make the trading products have the commodity characteristics, but also build up a relative sophisticated financial product trading system, pushing the innovation process of domestic gold markets and fulfill the transition from the spot market to the financial market in deed.