Hu QihuaTHE official launch of the much-awaited Shanghai Gold Exchange was yet again postponed, further delaying China’s move towards gold market deregulation. Wang Zhe, general manager of the exchange, said in early August that due to some unsolved issues, the official debut of the exchange has been pushed back. He declined to give a prediction as to how long the postponement will last.It’s the fourth time in as many months that the opening has been delayed. A hurdleAmong various possible hurdles, tax issues stand out. As the exchange will conduct spot trading in the early days of its operation, which according to State regulations is subject to a levy of 17 percent value-added tax (VAT), the trade cost will be unacceptably high for market participants. “The Shanghai Gold Exchange’s current position of focusing on spot trading will augment the trade cost. Together with membership fees, transportation fees and other service charges, the gold price inside the exchange will be higher than what it should be,” said Liu Shanen, a researcher with Beijing Gold Economy Research Institute.In an attempt to increase its appeal, the exchange has been working hard to win government approval to exempt the traders from the VAT. In late May, Wang Zhe disclosed that the issue of VAT had been solved, with it being levied and returned to the traders on the spot.However, the issue becomes ever more complicated as many experts oppose any kind of VAT. They argue that the exchange is a commercial entity responsible for its own profits and losses, unlike China’s central bank, the People’s Bank of China.It would be detrimental to market competition if the exchange were to be granted special treatment in being exempted from VAT. Market deregulationFor decades, the People’s Bank of China has been the sole decision maker regarding China’s gold production and circulation. Gold producers have to sell all of their output to the central bank, which then resells it to gold users.But, after one and half year’s preparation, the Shanghai Gold Exchange started simulated operations November 28 last year. The basic function of the exchange is: to provide location, facilities and related services for gold trading in China; to coordinate and supervize transactions; to oversee settlement, delivery and shipment of gold and other precious metals; to determine a fair price for the commodities transacted in the exchange and to publicize market information.The mock operation was widely deemed as a milestone in China’s move towards gold market deregulation. The seemingly endless trial period has irked many participants. “We are dog tired,” an unidentified bank manager told the Beijing Morning Post. “Staff training and system buildup have finished. Products have been designed. Everything is ready and we are waiting for the official launch of the exchange.”The planned Shanghai Gold Exchange has 108 founding members, including commercial banks, gold mines, gold refineries, gold jewelry manufacturers, mints, gold import and export firms and gold trading companies that meet the required qualifications. In May this year, the four major State-owned commercial banks were given a green light by the central bank to conduct certain gold businesses, including retail services of gold investment for individuals. As people in China are paying more attention to personal finance, gold investment stands a good chance to be favored by customers, given the country’s volatile stock markets. But with the gold exchange on hold, banks can do nothing about their new products but wait.Hope remainsNevertheless, the gold market deregulation continues, if more slowly than some would wish. Prior to the mock operation of the gold exchange, the People’s Bank of China introduced a weekly gold pricing system and abolished the gold products retail licensing system. Recently, the weekly pricing system was replaced by a daily system, which means that although China’s gold market has yet to dock with the outside world, in practice it’s been minutely adjusted according to fluctuations in the international market.There is some encouraging news. In mid-August, the first public bidding for the excavation rights to a gold mine concluded successfully in Nanchang, capital city of eastern China’s Jiangxi Province.Valued at 2.2 million yuan (US$0.27 million), the mine was purchased by Nanfang Mechanical Engineering Limited Company for 2 million yuan. The company promised to develop the mine scientifically, with enough attention to work place safety and environmental protection. The mine’s total gold reserve is put at 574 kilograms.Though it’s a small mine, the bidding drew widespread media coverage. “Using public bidding to deal with excavation rights to gold mines opens up a small crack that is likely to result in big breakthroughs,” said Zheng Shaojin, a director with the Ministry of Land and Resources.Given the stringent control over gold mining and trade in China in the past, the bidding serves as an important step in prying open the gold market, according to the Beijing Morning Post.On top of all this, the Shanghai Gold Exchange remains the focal point. The Shanghai-based International Finance Daily quoted Li Zuoxiu, an expert involved in the design of China’s gold market reform plan, as saying that China intends to spend 5 years reforming the gold market.After the gold exchange goes into normal operation, the People’s Bank of China will procure only a certain proportion of the output by gold-producing firms and allow the remaining to go freely into the market. This step will take two years. When the gold exchange matures, the central bank will completely halt its procurement of gold, and firms will be given free rein to send their products on to the market. The nationwide opening of the gold market will take around three more years.According to industry observers, it is the ideal time for China to reform the regulatory framework of the gold sector as, while the country’s gold reserves have been increasing, high prices on the international market are beginning to ebb.A few years after deregulation, domestic demand for the precious metal is expected to increase to between 500 and 600 tons annually from the current level of around 200 tons, according to Kerr Cruikshanks, corporate director of the World Gold Council.