Shanghai Gold Exch:Need Higher Gold Reserves-2
 

July 27, 2005 03:15 ET (07:15 GMT)
Copyright (c) 2005 Dow Jones & Company, Inc.

Shanghai Gold Exch: China Can Lower FX Risk Through Gold

SHANGHAI (Dow Jones)--China should increase its gold reserves to lower its foreign exchange risk from growing foreign exchange reserves, said the head of the Shanghai Gold Exchange on Wednesday.

"I suggest that China should diversify its national reserves to different types of low-risk products such as gold and oil in the longer term," said Shen Xiangrong, chairman of the Shanghai Gold Exchange board in an interview with Dow Jones Newswires.

Shen said that following the revaluation of the yuan late last week, the risk of a drop in the value of China's foreign exchange reserves was rising.

The People's Bank of China said last week the yuan's de facto peg to the U.S. dollar would be dropped in favor of a managed float against a basket of currencies. In the process, the yuan was revalued 2.1% to CNY8.1100 to a dollar.

The central bank hasn't and likely won't disclose the composition of the basket. Some analysts have raised the possibility of gold being part of that basket, but most are doubtful it would be.

"It's unlikely that gold will be part of the currency basket, and I don't recommend it either," said Shen. "Speculation on the international gold market may distort the real value of the local currency (if added to the basket)," he said.

In terms of increasing the gold reserves, which are held by the central bank, Shen declined to give a target level. According to the latest report by the central bank, China's gold reserves were at 19.290 million troy ounces by the end of June, unchanged from the end of last year. Foreign-exchange reserves rose to a record $711 billion by the end of June, up 16.6% from the end of 2004.

Gold Consumption May Rise 20% In '05

Shen forecast China's gold consumption to rise 20% to around 12.86 million troy ounces this year, on increasing demand for gold from jewelry makers and local manufacturers for industrial use.

But he said the revaluation isn't expected to further boost demand for the precious metal.

"A minor 2% rise of the yuan (against the dollar) won't be a big spur for local consumption," said Shen.

Shen said the exchange has submitted a plan to the central bank to allow foreign investors to trade gold on the Shanghai exchange to help boost local gold trading.

"Quite a few international banks, such as the Deutsche Bank AG (DB), have shown great interest in trading here, but we are waiting for the central bank to approve the plan," said Shen.

Shen added there was no timetable for opening up the gold exchange to foreign investment, but he hoped it would take place the next three to five years.

China is currently the world's fourth-largest gold consumer. Its gold production hit a record 212.348 metric tons in 2004, up 5.86% on year.

The Shanghai Gold Exchange, opened in October 2002, currently trades gold bullions, gold bars and platinum.

-By China Bureau, Dow Jones Newswires; 86-21-6120-1200; djnews.shanghai@dowjones.com

(Zhu Hui contributed to this article.)

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