How China emerged as a major player in the gold market

Gold has held a special place in global trade for millennia and continues to do so today, despite the rise of fiat currencies like the US dollar as the default option for storing wealth. However, its importance is especially high in modern Asian nations, most notably China, where gold retains a cultural significance that has waned somewhat in other parts of the world.

Demand for gold traditionally spikes in the lead up to Chinese New Year and Golden Week as people flock to retailers to buy golden jewellery and other items. In fact, more than 190 tonnes of gold are sold by jewellery stores during the three months around Chinese New Year.

However, market watchers say that trend may weaken in the future as younger Chinese increasingly prefer to spend their money on experiences like travel, rather than material things. Still, China remains the world’s largest consumer of gold and is unlikely to relinquish the title any time soon (at least while import restrictions continue to dampen sales in India – previously gold’s largest market).

Of course, the gold market is about a lot more than jewellery. Here are some of the other factors driving demand in China.

China’s central bank has built up its gold reserves dramatically over the past two decades, going from 395 tonnes at the turn of the century to more than 1900 tonnes today. Its appetite for gold appears to have only grown in recent years as it works to build up a hedge against its large holding of US dollars in response to trade tensions.

The country is widely expected to continue buying gold over the coming years and decades as it works towards a long-term goal of having the Renminbi/yuan replace the dollar as the default global currency. Given that gold currently accounts for only around 2.5% of China's Central Bank reserves (compared to 75% for the US) it has a long way to go.

The Chinese government has actively encouraged Chinese citizens to invest in gold bars and coins as a way to store their growing wealth. Unsurprisingly, many have taken up the recommendation.

The Chinese government has also used the Shanghai Gold Exchange to both encourage investment in the yellow metal within China and assert the country’s position at the top of the gold market. All domestically mined, imported and recycled gold is traded via the SGE – and since the country is both the biggest producer and consumer of gold, that makes the exchange globally significant. To stoke investor appetite, the government has removed VAT (value-added tax) from gold purchases through the SGE, unless a profit is made. Meanwhile, the establishment of the Shanghai Free Trade Zone in 2014 has allowed non-Chinese banks to trade on the SGE and import gold into China.

To consolidate its growing importance, China introduced its own benchmark gold price in 2016 – a rival to the dominant London Bullion Market Association (LBMA) benchmark. The Shanghai Benchmark Gold Price is based on a kilogram of gold, deliverable to SGE-certified vaults and denominated in Renminbi/Yuan. 

Global investors are increasingly looking for exposure to the Chinese gold market and the CME group, a global market leader in options and derivatives, in 2019 launched two new Chinese gold futures contracts to meet demand. These contracts are both based on the Shanghai benchmark, with one denominated in US dollars and the other in Renminbi/Yuan. 

For more on futures and commodity trading, visit our Commodities​ page.

The rise of exchange-traded funds has created a new avenue for investors to invest in gold. These ETFs are designed to mirror the price of gold, allowing investors and traders a relatively low-cost way to gain exposure without having to physically invest in the commodity or buy futures contracts. These were first introduced into the Chinese market in 2013 and have gradually grown in popularity, with local ETFs there holding a record $3.9 billion in assets under management in the first quarter of 2021.

As its economy continues to grow, China is likely to become an increasingly powerful player in the global gold market. Already the world’s largest gold miner and consumer, the country is now working to increase its global influence via the Shanghai Gold Exchange while its central bank is buying up gold at a fast pace and is expected to continue to do so for some time as it tries to diversify away from its US dollar holdings. As with everything China does, global investors are watching closely.