Gold is used by the People's Bank of China, the central bank, as a foreign exchange reserve, but later this year a gold exchange will be launched.

Individuals will then be able to buy, sell or hold gold bars for the first time since the founding of the People's Republic of China in 1949, when the practice was banned.

Demand is expected to rise to 800 tons a year over the next 10 years after the deregulation, said sources from the World Gold Council, a gold promotion organization funded by major mining companies around the world.

Previous years have seen demand lingering at around 200 tons, largely because of tight government controls on the gold market.

The need to relax controls and allow gold to play a role as a common commodity and an investment tool for individuals grows alongside China's increasing capability of earning foreign exchange.

The first step towards deregulating the market should be setting up a national gold exchange, and this could be launched later this year in Shanghai, China's financial center. More specific plans are still waiting to be approved by relevant government departments.

Roland Wang, a council manager based in Beijing, said demand was expected to rally from a robust increase in gold jewellery consumption after market deregulation.

"An increasing competitive jewellery market will stimulate consumption in China with foreign gold processors allowed into the Chinese market,'' Wang said.

Jewellery currently accounts for the vast majority of gold demand in the country.

The increase would benefit from an expected move by the government to allow individuals to buy, sell and hold gold bars as an investment or saving during the second step of the market deregulation programme proposed by the gold council, he said.

Cai Xiaodi, an analyst from the Beijing Gold Economic Development Research Center, said the demand had great potential to be tapped in other areas, such as decoration and building sectors, after market deregulation.

Wang said the gold's function resumption was also compounded by a predicted increase in the disposable income of the public with China's steady economic growth, to strike an annual 7 percent in coming years.

Owning gold remains a symbol of wealth for many Chinese people.

He said China would become one of the key markets of the council's gold promotion campaign in the near future. The council has planned to invest US$50 million in the promotion worldwide this year, compared with around US$30 million in 2000.

The central bank has shown strong commitment to deregulating the gold market and bringing domestic gold prices more in line with world levels.

The latest example is that the bank last week increased its gold purchase price to US$73.78 a gram from US$69.55 a gram, following a price hike on the world market.

(China Daily 05/29/2001)