2010 arrives in China on the back of a golden tiger

Girls born in the Chinese Year of the Tiger will not make good wives, they are aggressive, ambitious and overwhelm the family. Also, 2010 will be an inauspicious year for marriage and risky for the markets. And as brokerage firm CLSA pointed out in its 16th annual Feng Shui Index report, the year will be marked by dramatic changes and upheaval.

The first shock came on Friday, two days before the Chinese New Year, when Beijing hiked the reserve requirement ratio for banks by 0.5 percentage points, triggering a sharp drop in gold futures worldwide. For some weeks now, investors have been on edge, hoping that the Chinese government would not withdraw liquidity too rapidly.

But superstition and monetary policies aside, gold, like most other commodities in China, will have a powerful run this year.

The yellow metal will remain an attractive buy for private as well as institutional investors, even as Beijing sets itself a target of acquiring 1,000 tonnes per year, build its stockpile, diversify its foreign exchange reserves and use it to hedge against a battered dollar.

Golden run

Among its many firsts, China has leaped ahead in the bullion race, too. It beat South Africa and Australia to emerge as the biggest gold miner since 2007. Last year it surpassed India as the world's top private gold consumer.

On the derivative exchanges, China's gold futures trading volume hit less than 3 trillion yuan in 2009, double that of the previous year, while turnover on the Shanghai Gold Exchange, on a rolling 12-month basis, was also at its highest last year.

Between 2003 and 2009, Chinese households bought over 1,800 tonnes of gold. This was almost four times what the People's Bank of China acquired in the period. With household incomes increasing, Chinese consumers are buying more jewellery and investing in gold assets, boosting gold demand phenomenally.

Private gold now equals some two per cent of China's massive household savings. From the individual investor's point of view, gold has a religious and auspicious appeal in Chinese culture and unlike India, private buying has grown even as prices shot up. This suggests that gold will be in for another bull market run this year.

More crucial has been the role of China's banks in the bullion market. In a sensational announcement last April, the People's Bank of China said that it had increased its gold reserves by 454 tonnes to hit 1,054 tonnes over the previous six years.

China, which is rather secretive in handing out information on its bullion reserves, created a stir, prompting analysts to declare that China wants to become a super power not jut politically, but in gold reserves, mining and sales.

The gold mining industry has enjoyed steady growth in recent years with mining companies utilising the capital markets to accelerate the pace of resource acquisition and integration, and has become competitive internationally.

China is now working on developing a mature gold investment market. The newly-listed Gold Futures on the Shanghai Futures Exchange marks the start of gold forwards contracts, a key tool for mining firms to raise capital from future production.

Foreign reserves

It is now a matter of heated debate whether China would increase its gold reserves in an effort to reduce its US dollar exposure in its foreign reserves.

Since the start of 2000, China's official gold reserves have grown by 167 per cent to 1,054 tonnes by April 2009, which is the world's fifth largest central-bank hoard.

Interestingly, gold forms only 1.6 per cent of China's foreign currency reserves.

According to analysts at Bullion Vault, an online commodity exchange, China is focused on raising its official reserves. After the Second World War, the United States had more than 21,000 tonnes of gold and as a result, the dollar could dominate the world.

Now, with the dollar battered and the economic might shifting to the Far East, the Chinese are trying to build a giant bullion stockpile.

Gold experts say that China will start investing in at least 1,000 tonnes of gold per year for its official reserves. It should reach 6,000 tonnes in the next three to five years and perhaps 10,000 tonnes in eight to 10 years.

The columnist is a freelance business writer based in China.