Monday, May 5, 2008

A Concise History of Gold in China

China’s Gold: The Eternal Treasure

By Sang Shang,

Business Culture magazine

2007, No. 19

Translated from Chinese by China Gold News Blog

China is a “gold poor” country. The total amount of gold held by both private citizens and the government reserves amounts to between 4000-5000 tons of gold. Compared to the global average per capita gold held by private citizens, China’s per capita gold is about 1/10 of the average. Although China was the first company to exceed $USD 1 Trillion in foreign exchange reserves, the fraction of these reserves in gold is very small. Last year’s announced number was only a bit over 600 tons. Compared to America, Germany, France and even Italy this is much less. In terms of overall rankings, China ranks about tenth place or so in terms of gold reserves.

Thinking of ancient times, before the Qin and Han dynasties, seen and recorded gold rewards or transactions frequently ranged from a few dozen to 100 jin (a jin is about 16.1 troy ounces). After the Han Dynasty, this level of abundance was never seen again. There are two theories regarding this occurrence. The first says that what the ancients so-called gold was actually copper and not really gold. The second theory is that the previous riches of the ancients were frequently hidden by their owners in the chaos that surrounded the collapse of the Han Dynasty (about 220 AD). According to this theory, most of the pre-Han gold disappeared or was hidden underground. No matter what you believe, it is a fact that after the Han Dynasty the amount of gold in China has continuously been very little.

In recent times, there is a complicated legal case due to the fact that the retreating Nationalist Government took all of the gold reserves to Taiwan after the revolution. Relatively reliable estimates of the amount of gold shipped range around 2.77 million liang (similar to tael; a liang is 50 g and about 1.61 troy ounces; total about 139 metric tons). The highest estimate is 28 million liang (about 1400 metric tons). How much gold is 2.77 million liang? About the total domestic gold production of mainland China from 1949 to 1964. For this reason, it can be said that the current Chinese renminbi rose from a start of only about 6000 liang (0.3 tons) of gold.

Before fleeing to Taiwan, the Nationalists forced citizens around China to hand over their gold bracelets, hidden stashes of gold, and silver bars which were all declared illegal. Soldiers entered private residences to search for gold that had not been turned in. Those who were caught were sent to jail. It is said, a man at that time named Mei Lanfang had skillfully collected several hundred liang of gold over the years and after turning in all his gold an unaccounted gold bracelet was discovered.

After the establishment of the communist government, the People’s Republic was forced to face this serious problem of a paucity of foreign exchange. There was neither gold nor US dollars. This continued to the beginning of the land reforms and according to the records at the lowest point there were only a total of about a few tens of millions of US dollars. However, if a country wants to develop it must receive large imports of needed products. At that time, except with other communist countries with which it was easy to barter with, dealing with Western countries it was necessary to get hard currency. In order to get hard currency there were two main methods: one was to save food and clothing to export for foreigners to buy in order to obtain foreign exchange. There are two examples of this. One was two years after the “Great Leap Forward” although the country was starving, grain was still exported. The other was fishing for large amounts of prawn in the waters near China. However, the vast majority of Chinese were not familiar with how to handle prawns.

Another method of gaining foreign exchange was to once again search homes for gold. After the founding of the People’s Republic, gold trading was placed under a state monopoly and it was illegal for private individuals to trade gold between themselves. They could only sell it to the People’s Bank of China (the Chinese central bank). Although in theory it was still legal for private individuals to hold gold, in the political climate of the times, to privately hold gold and not support the state programs had become unconscionable and evidence of lacking confidence in the New China. Under these circumstances, the hidden private gold of Chinese citizens once again flowed to the state. There are a few difficult to verify figures on the amount of gold. It is said in 1950 alone, Guandong province turned over more than 7 million liang (about 350 metric tons). No matter how you calculate it, it is an undisputable fact that for the 30 years after the revolution, the gold held by citizens went to the government. This gold was basically all used to import goods and was not stored as reserves. Therefore, twenty years ago, most Chinese people had never seen gold of any type with their own eyes and it almost became a metal of story and legend.

Since China historically had very little gold, therefore gold did not have the opportunity to become a mainstream medium of exchange or become minted into a standard coin. China also is short of silver and before silver was imported in large amounts China’s most important coin was copper. First there was a green copper coin and later the yellow copper coin emerged. Therefore, in the flowering period of Western Han power and prosperity, most of the money in the warehouses was described as stored away and rarely circulating copper coins.

But China’s copper was also relative scarce and the shortage of hard currency was a constant pressure the Imperial Court had to face. Therefore, sometimes there were some types of silk fabrics that could be used as currency. In historical writings, the emperor gave rewards with large quantities of these fabrics. In fact, it was the same as rewarding someone with money. Lack of hard currency was another factor in the birth of the world’s earliest paper currency in China.

After the Song Dynasty (around 1279 AD), China’s flow of silver gradually increased. The first silver came from Japan and later from America. China slowly adopted silver currency and used a silver backed currency. The early Republic of China’s Silver Yuan is the best example of this. However, after the 1840s, because of payment of foreign reparations, China’s silver again became scarce. By the 1930s, the Nationalist government was issuing legal tender pegged to the American Dollar and British Pound. One can say this was not particularly sound monetary arrangement. Then the war against Japan nearly destroyed China’s economy and this system became untenable. In the end, the government issued money lost all credibility and became completely worthless.

After the Revolution, the renminbi has presented as a precious metal backed currency valid throughout the whole country. In the following decades, although it still is not fully convertible, it is accepted as hard currency around the country and is becoming an increasingly strong global currency. In reality, throughout the last several thousand years of Chinese history, the lower classes have rarely had a chance to touch gold or silver. “10,000 liang of gold! (unimaginable wealth)” and “Three years of good governance, 100,000 pieces of sliver (meaning a period of good governance was often followed by corruption)” are sayings that reflect the reality that the people who actually saw gold or silver were very few. Knowledge and understanding of the relationship between gold currency and weights and measures was not widespread.

Today, gold can be measured in three main units: grams, ounces, and liang. The gram is simplest. 1000 g make up 1 kg; an English ounce is 28.35 grams. But most gold is measured in troy ounces which is 31.1 grams. 1 troy ounce is 1.1 regular ounces. The liang is most complicated. There are 50 g in one liang; there are ten liang in one jin. Today, many gold bars are 1 liang (50 grams). There is also an old liang also called the kuping liang or the sima liang. There are 16 old liang in one old jin. This liang, is currently used in the Hong Kong gold market and is known as a tael and is 37.43 g. This is the standard left over from the Ming and Qing Dynasty. The modern 1 tael of sliver is about this weight. There is one more unit, the “small liang”. It’s origin was the reform in the weights and measures made by the Nationalist government during its time in power. This unit was set where a kuping jin was 500g in weight but in order to keep the standard familiar to most common people, there were still 16 small liangkuping jin. This small liang is set at 31.25 grams and is not much different from a troy ounce (1 small liang is 1.00471 troy ounces). Therefore, if someone says he hays 100 liang of gold, you must ask him to clarify which liang he is using. to one

So what do you do with gold? The general answer is that it can preserve and increase wealth. In reality, this is a bit of an incomplete description. First, regarding increasing wealth, capital can only increase in value once it is put back into circulation. The increase in value is seen after gold is exchanged again. The greatest weakness of gold is that there is no way to generate interest. There is no bank that will let you deposit 1kg of gold and come back a year later to withdraw that 1kg of gold along with 50g of gold interest. This weakness helped push gold down to its lowest point in 20 years in 1999 at 252 US Dollars per ounce even as gold extraction prices were rising. In the end, the world’s central banks signed the Washington Agreement to maintain gold at its then current level.

Its ability to preserve wealth is also a difficult aspect to describe. In fact, due to the relationship between supply and demand as well as the change in the extraction rate, over a long time the price of many commodities versus gold can fluctuate up and down over time. Most importantly, the rate of increase in the global money supply is faster than the appreciation rate of gold, so the share of gold in terms of the total money supply is steadily shrinking. 100 years ago, 100 ounces of gold was a small fortune anywhere in the world. These days, at best this could only make someone middle class.

From the perspective of investment opportunities, gold is still not necessarily always a good investment. Its value can often fluctuate wildly. From 1944 to 1971 gold was fixed at an exchange rate of $35 per ounce due to the Bretton Woods agreement. After the agreement was scrapped in 1971, throughout the 70s gold went on a bull run and because of the War in Afghanistan hit a high of $850 per ounce in 1980 (about $2000 per ounce in current dollars). Later it hit an all-time low in 1999. In the most recent year has risen over 100% to the current price of about $670 per ounce. This is comparable to a stock market, foreign exchange, or futures market return but such performance for gold is hard to come by.

Therefore, are there still other attractions to gold? First, the separation of legal tender and precious metals has only a short history of several decades while gold has been a medium of exchange possibly for up to 10,000 years. Legal tender money is completely based on the belief that it can be used and accepted. In normal times we don’t need gold but if one day there is some sort of loss in confidence in money, what then?

Second, is the durability of gold as a material and its rarity. In total, including gold put into circulation and reserves about 200,000 tons of gold have been mined throughout history with a current value of $4.2 trillion. You could only say there is more if you believe in the mythical alchemy of creating gold or found a mountain of gold in the middle of a rainbow. Moreover, the current consumption is exceeding new discoveries of gold. Each year the world exchanges about 3000 tons of gold and 15% of this is used in industrial processes. This portion is extremely difficult to recycle. At the same time gold extraction costs are increasingly higher and are now at about $300 per ounce. This is the lowest possible price gold should ever fall to. Holding gold is also a form of personal investment diversification and a form of insurance against a disruption of normal activity in society and the economy. You shouldn’t own too much but you should not go without.

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