Analysis: China's gold frenzy triggers birth of small bourses
SINGAPORE (Reuters) - Twenty-four-year-old Xin Wenting stays up until one o'clock on most days, looking after her gold investment during the ebb and flow of global trade.
Many small investors in China have turned to gold as high inflation threatens to erode wealth in the world's second-largest economy, leading to small gold exchanges springing up all over the country.
The influx of retail investors promises to not only boost Chinese gold demand, but also increase its volatility.
"I wanted to invest my savings, because otherwise the money would just be idling around. Some friends were doing gold, and the stock market wasn't looking promising, so I jumped on the bandwagon," Xin said.
Investment choices for small players are limited, and the new exchanges are filling this niche.
"Many existing institutions target their investment products to the rich," said Lu Mingde, who is in charge of the marketing department of the Zhejiang Gold and Silver Products Market.
"If you are a small investor, you could only put your money in the stock market. But we are happy to serve these clients."
The exchange launched trading of spot gold and silver in August 2010, and added ruthenium this month. Total trading volume stood at 3.1 billion yuan ($486 million) by 1358 local time, according to the website of the exchange, which trades from 0930 a.m. to 0800 a.m. the next morning.
Volume on the spot gold deferred contract on the Shanghai Gold Exchange, known as gold T+D, hit a daily record high of 39,128 kilograms on August 25, or about 14 billion yuan in value.
On October 24, trading volume on the contract shrank to 8,010 kilograms, or 5.4 billion yuan.
WHEN THERE IS A NEED, THERE IS A WAY
China's benchmark Shanghai Composite Index .SSEC has slumped about 16 percent so far this year, compared to a 13-percent rally in prices of Shanghai's spot gold deferred contract.
The country's property market, once a popular choice for investors, has suffered from a government crackdown on speculation.
"I still have some money in the stock market, but it's been trapped since the market crash in 2007. Ever since I started doing gold, I don't want ever to deal with the stock market again," said Ren Yanhong, who runs her own clothing business in the eastern city of Shaoxing and started investing in gold in 2008.
A number of new exchanges have mushroomed over the past year in cities away from the business hubs of Shanghai and Beijing.
"Investment demand is very big," said Shi Heqing, an analyst at state-backed metals consultancy Antaike in Beijing.
"These emerging exchanges are trying to lure investors who are not totally happy with the existing market in Shanghai."
The Shanghai Gold Exchange and Shanghai Futures Exchange are the primary market place for China's precious metals investors. The SGE trades spot gold, silver and platinum, and the ShFE trades gold futures.
Compared to the small exchanges, they offer bigger trading lots, hence higher initial capital commitment from their clients, and are open for shorter trading hours.
With a margin requirement at 12 percent, investors need to put down about 40,000 yuan for a deposit to trade one lot of SGE spot gold, a volume of one kilogram.
The emerging exchanges offer a lot size as small as one ounce, which lowers the capital needed to begin trading, even though the margin requirements can be as high as 30 percent.
With lot size set at 10 ounces and margins at 20 percent, the initial capital requirement to start trading is about half the amount required by the SGE.
A SPECULATORS' PLAYGROUND
Emerging exchanges claim to trade physical gold, but most investors are not interested in taking physical delivery.
Some exchanges make it difficult and expensive to take delivery. The Zhejiang exchange, for example, charges 17 yuan per gram for physical gold delivery.
"Who would want to take physical gold? People just want to speculate on price moves and make a profit," said a customer service representative at the exchange who gave her last name as Chen.
Analysts compared the gold investment spree to the wave of retail stock market investors in the last decade, who rushed to a bull market with little know-how, only to suffer huge losses during later market turbulence.
The legitimacy of these new exchanges is also debatable. Some bourses were approved as bulk material wholesale markets and others got licenses for conducting e-commerce.
China's gold market is officially regulated by the country's central bank, which did not respond to Reuters enquiries regarding regulation of these small exchanges.
A MORE OPEN MARKET
Chinese nationals are not allowed to invest in overseas financial markets except through products offered by institutions under the scheme of Qualified Domestic Institutional Investor(QDII).
But a rampant underground gold market has developed to sidestep rigid regulation and feed demand form Chinese investors who want exposure to foreign markets.
Despite the risk to investors of placing their money in the hands of companies unregulated by Beijing, many go ahead.
Xin Wenting's trading account is with a firm based in Hong Kong.
"I chose it because my friends had been investing with them and I have been quite happy with it so far," she said, although she said she had heard tales of investors unable to retrieve funds.
Although China's central government has vowed to open up the market, and has made progress by allowing more foreign banks access to the two Shanghai exchanges, an open market for retail investors is yet to take shape.
"We hope gradually the market will open up and there will be legitimate ways for individuals to participate in the global gold market," said Hou Xinqiang, an analyst at Jinrui Futures in China, adding that such access would diminish the appeal of underground gold investment as well as of the small exchanges.
But it was unlikely to happen as long as the country's foreign currency exchange remains tightly controlled. Until foreign exchange controls are lifted, Chinese gold bugs would continue to need tables to put down their bets.
"The Chinese love gambling," said Hou.
($1 = 6.375 Chinese Yuan)
(Editing by Michael Urquhart)