The China Merchants Bank (CMB) launched its repurchasable gold bars business in the capital city on Tuesday. It plans to extend the business to Shenzhen next, and a step-by-step national rollout is likely to follow.

CMB is a sales agent for the repurchasable gold bars processed by CGS Ltd., a mainland-Hong Kong joint venture. The first batch of gold is available in two-ounce, five-ounce and 10-ounce bars, all 99.99 percent pure.

The buying and selling prices of the gold bars will fluctuate based on the quotation of the London Precious Metals Exchange and with reference to the Shanghai Gold Exchange, China's sole gold market.

Yesterday, gold bars were bought at 3,272.9 yuan (US$394.33) and sold at 3,279.1 yuan (US$395.08) per ounce, or 105.23 yuan (US$12.68) and 105.43 yuan (US$12.7) per gram, according to the CGS Standard Gold Bar Quotation.

CGS declined to disclose the exact amount of gold it has provided to CMB, but it has guaranteed enough to supply the market.

Huang He, of the CMB Beijing Branch, said a processing fee of 109 yuan (US$13.13) per ounce for buying and 62 yuan (US$7.47) per ounce for selling is added to the transactions.

Trial operation of the gold business was conducted in Chengdu, capital of Sichuan Province, from last November.

On November 2, the first business day, five CMB Chengdu outlets sold a total of 4,167 grams of gold. The transaction value reached 460,000 yuan (US$55,422), with the selling price set at 107.05 yuan (US$13) per gram on the day.

A CMB expert estimated the yield on repurchasable gold bar transactions might reach 5 percent on average.

"We are cautious about expanding the business and will concentrate on nurturing it. That is why we do not expect quick and high returns in the primary stage," said Gao Li'ang, general manager of CGS Ltd.

Meanwhile, the company and CMB will jointly provide more investor services and derivative financial products, including an online business and gold mortgages.

Small gold bars have been available in China since November 2002, when department stores in Beijing, including China Art and Crafts Plaza, Guiyou Plaza's Jianguomen and Fangzhuang outlets and the Caishikou Department Store, were given the go-ahead to sell gold bars to individual consumers.

"The gold transactions in the bank are more standardized and convenient than in the department stores, given the bank's reliable financial support and rich financial management experience," said Xu Shouxin, deputy secretary-general of the China Gold Association.

Most of the gold bars sold in department stores are for decoration and commemoration, and attract higher processing charges than the standard gold bars.

The Bank of China Shanghai Branch launched its Gold Treasure paper gold business last November, which has witnessed transaction volume growth of 40 percent month-on-month.

So far, four State commercial banks have submitted applications to the China Banking Regulatory Commission to open gold transaction businesses.

The Shanghai Gold Exchange will begin trial issue of 50-gram gold bars next Monday. Currently, the smallest bars traded are 1 kilogram.

"The new product is to meet the requirements of individual investors and further accelerate transactions in the market," said an official of the Shanghai Gold Exchange.

Liu Shan'en, an expert at the Beijing Gold Economics Research Center, said that businesses are all eyeing the huge potential of the gold investment market.

"Currently, the nation's deposits stand at 10.3 trillion yuan (US$1.2 trillion). After liberalization of the market, the capital flowing into the gold investment market is estimated to be between 60 billion yuan (US$7.2 billion) and 200 billion yuan (US$24.1 billion), according to our research," said Liu.

The China Gold Association reports that China is the third-largest gold consumer and the fourth-largest producer internationally. The country consumed 230 tons of gold in 2003, and produced 200 tons.

(China Daily June 23, 2004)