Shanghai Gold Exchange Physical Delivery Equals Chinese Demand

Submitted by Koos Jansen, In Gold We Trust:

In this post I will further analyze the structure of the Chinese gold market, display new findings on how we can measure Chinese gold demand by the amount of gold withdrawn from the Shanghai Gold Exchange (SGE) vaults, discuss the consequences from these findings and touch upon a few other aspects of Chinese demand. Because of my belief that this is highly important information, I will try to be painstakingly accurate in this post and support my analysis by appending various sources.

SGE physical delivery year to date is 2023 tons, second number from the right (累计交割量) is gold withdrawn YTD in Kg, and will be 2146 tons by year end. Total demand including PBOC purchases will be over 2500 tons en net import 2000 tons.

The key institutions of the Chinese gold market are the Shanghai Gold Exchange (SGE), the Shanghai Futures Exchange (SHFE), the People’s Bank Of China (PBOC) and the China Gold Association (CGA). A good part of my information is based on three types of reports published by these institutions: the CGA Gold Yearbooks, the SGE Annual Reports and the China Gold Market Reports. I will refer to them as the gold reports or just the reports. Some editions are publicly available on the SGE website, some were sent to me by contacts in the mainland. Although most of these reports are compiled through a collaboration of the four institutions, in this post the PBOC will be referred to as the writer.

When I speak of total Chinese demand in this post, I mean total demand as described by the China Gold Market Reports, written by the PBOC. This includes jewelry, coin, bar and all sorts of industrial demand, it excludes PBOC purchases. Thomson Reuters GFMS and the World Gold Council use different measures of demand as I will discuss later. When I speak of SGE delivery I refer to the amount of gold withdrawn from the SGE vaults. 

The Structure Of The Chinese Gold Market

Let’s start with a few basics about the Chinese gold market. Like the title of this posts suggests and like I have exposed in part one, we can measure Chinese demand by how much gold is withdrawn from the SGE vaults. This is possible because of how the Chinese gold market is designed by the PBOC. In China all fresh gold (my term for mine and import supply) is required to be sold through the SGE, and once bars are withdrawn from the SGE vaults they are not allowed to be re-deposited. These facts are essential for our understanding of this market. Let me explain further:

China Mainland Gold Imports

Although the rules might change sometime soon – the PBOC recently published a draft of new import rules – at this moment there are nine commercial banks that are allowed to import and export gold, and engage in gold consignment.

1. Industrial and Commercial Bank of China
2. Shenzhen Development Bank
3. Agricultural Bank of China
4. China Construction Bank
5. China Minsheng Bank
6. Bank of Shanghai
7. Industrial Bank
8. Bank of China
9. Ping An Bank

There are also 6 other companies that are allowed to import and export gold products like jewelry. Individuals are officially allowed to import and export 50 grams of bullion, though customs is less stringent on the import side.

This is how Consignment works, from the China Gold Market Report 2009:

Gold consignment business

China imposes stringent controls over import and export of gold raw materials; only the big four state owned commercial banks are allowed to engage in the agency business of gold import and export, and “gold consignment” is the main means for import. Under the gold consignment scheme, a foreign commercial bank consigns its gold to the coffers of a Chinese commercial bank which determines the price of the gold consigned and sells it through SGE in accordance with China’s gold regulatory policy, international gold prices, exchange rates and other factors.

Consignment licenses were first to handed out by the PBOC in 2003 to four banks, as part of China’s three transformation gold market strategy. Five other banks were handed licenses in 2010. I came across a very informative article on sina.com from the same year:

“我们也是刚获得进口黄金资质，一切都在学习中。”一股份制银行黄金业务人士表示，“听同行介绍，每一笔进口业务都要向央行报告；我们进口黄金都是标准金，也要先进入上海黄金交易所交易，即便是自用，也需要先进入交易所市场。”

“We too just got the qualification to import gold, everything is being studied now.” A banker responsible for gold business at a banking corporation said, “according to the introduction by fellow bankers in the same business. Every import deal must be reported to the central bank. The gold we import is standard gold, which must be traded on the SGE first. Even if it’s for self-use, the gold must go through the SGE market first.“

There we can read the rule on gold import being required to be sold through the SGE first. The same rule was reported by Bloomberg this year:

Commercial banks that are qualified to import gold are required to sell their shipments into the bourse [SGE].

Chinese Gold Mining

Although I also touched upon this in part one, here’s the mining rule once again:

On October 30, 2002, the Shanghai Gold Exchange commenced operation under the supervision of the State Council. Thereafter, the PBOC ceased its gold allocation and gold purchase operations. All PRC [People's Republic of China] gold producers are now required to sell their standard gold bullion through the Shanghai Gold Exchange, and prices of gold on the Shanghai Gold Exchange are determined by market demand and supply, which essentially converge with the price of gold in the international market.

SGE Bars Can’t Re-enter the Vaults

Fact three is that gold bars withdrawn from the SGE vaults are not allowed to return. This means that all numbers from bars that are deposited in the vaults are registered*, and these bars are blocked from re-entering. A clear overview of the structure of the Chinese gold market later on may help understand the function of this rule. Bear with me.

Article 23 from the SGE rulebook states:

第二十三条 会员及客户提取的黄金实物，不能再入库交易。

23. Gold in kind withdrawn by members and customers, can not be re-deposited. 

SGE standard gold bar 100 gram
*This is what a SGE bar looks like.

1. 上海黄金交易所标准金条 Shanghai Gold Exchange Standard Gold Bar.

2. 上海黄金交易所标志 Shanghai Gold Exchange Logo.

3. 品牌标志 Brand Logo.

4. 金条品牌 Gold Bar Brand (In this case, it’s 泰山 Mount Tai, which is produced     by Shandong Gold).

5. 成色 Fineness.

6. 重量 Weight.

7. 金条编号 Gold Bar Number.

If you are a Chinese citizen you can buy gold or trade derivatives on the SGE only through a commercial bank. You’re required to open two SGE accounts at the bank, you pay 50 RMB and get 10-digit trading number. This number will stay with you forever, even if you switch banks. One of the accounts is the funds account, which records how much money you have deposited at the SGE, and the other is the gold account, which records how much gold you have. If you prefer to withdraw your physical gold from the vaults, beware of the second rule noted below.

Screen dump from ICBC website


This rule has been confirmed to me by my Chinese contacts in the mainland and over the phone by the SGE. This is not unique, on the Borsa Istanbul the same rule applies. When owners of SGE bars, or other bars, would like to sell their gold through the SGE this has to be melted again and assayed. The new SGE bars (with a new registration number), are allowed to enter the SGE vaults. In this process the gold is counted as scrap supply by the measures the China Gold Market Report dictate. From the China Gold Market Report 2008:


ICBC bank bar (gold)

Gold scrap

At present, gold scrap in China mainly is in two major forms: repurchase of gold bars, only applicable to brand gold bars in reference to real-time gold price, and repurchase of gold jewelry through retailers.

SGE Physical Delivery Equals Chinese Demand

As demonstrated in part one total demand in 2010 and 2011 reported in the China Gold Market Reports exactly equaled the amount of gold withdrawn from the SGE vaults over the same periods. Before we start connecting dots I would like to display more evidence regarding Chinese gold demand being equal to withdrawals from the SGE vaults.

As stated by the China Gold Market Report 2011 total demand was 1043 tons, according to the SGE Annual Report 2011 gold withdrawn from the SGE vaults was also 1043 tons:



Screen dump from SGE Annual Report 2011


The China Gold market Report 2010 states total demand was 837 tons, the SGE Annual Report 2010 shows a matching amount was withdrawn from the vaults:



Screen dump from SGE Annual Report 2010


In the CGA Gold Yearbook 2008 it was stated total demand was 543.2 tons, as we can see from the following table (the first column relates to demand):



首饰制造用金 = Jewelry
工业用金 = Industrial
金币生产用金 = Coins
金条囤积 = Bar hoarding
推断净投资 = Inferred net investment
合计 = Total

In the SGE Annual report 2008 we can read the following paragraph:

Affected by the global financial turbulence, growing investment demand for physical gold, including gold bars and coins, led to the rapid growth in spot gold trading and delivery volume. Spot gold traded through SGE totaled 1229.75 tonnes, an increase of 32.53%, or 301.83 tones compared to last year. Delivered Gold amounted up to 543.19 tonnes, an increase of 49.56%, or 180 tones compared to that of 2007. Physical delivery volume broke 500 tonnes for the first time and over passed the domestic gold production for a consecutive second year.

Screen dump of SGE Annual Report 2008


In all these reports we can see the gold withdrawn from the SGE vaults exactly matching total demand. In the CGA Gold Yearbook 2007 it was even spelled out for us:

2007年，上海黄金交易所黄金出库量363.194 吨，即我国当年的黄金需求量，比2006年增长了48.02%，低于供给增长率8.82个百分点。

In 2007, the amount of gold withdrawn from the warehouses of the Shanghai Gold Exchange, gold demand of that year, was 363.194 tons of gold, compared to 2006 increased by 48.02 percent, 8.82 percentage points lower than the growth rate of supply.

Implications Of The Structure Of The Chinese Gold Market

When we put together the facts presented above we are able to draw conclusions that not only provide detailed insight into the Chinese gold market, but will also help us understand the reasoning behind its design.

In any country there can be three sorts of gold supply to meet demand: mine, import and scrap. In China mine and import supply must be sold through the SGE, scrap supply can be sold through the SGE. For me, interested in Chinese demand and import, scrap supply is the pivot of the Chinese gold market.

import + mine + scrap = total supply

total supply = total demand

total demand = SGE delivery

import + mine + scrap = total supply = SGE delivery = total demand

We already know total Chinese demand by the SGE delivery numbers, but we want to know import to measure Chinese demand relative to foreign demand and reserves. The amount of scrap supply over any given period can tell us import numbers as, import = SGE delivery – mine – scrap, whereof SGE delivery and mine numbers are published. Unfortunately it is impossible to be accurate about scrap, we’ll have to settle for an estimate.
The PBOC works the other way around, they calculate scrap by knowing import numbers. From the China Gold Market Report 2008:

Physical gold withdrawals on Shanghai Gold Exchange (SGE) topped 543.19 tons in the year, including gold imports of 81.44 tons by commercial banks, stock carry-over of 31.661 tons from 2007 and 282.007 tons of gold produced in the year. In theory, the gap of 148.082 tons was filled by recycled gold. Therefore the gold recycled in China in 2008 should have amounted to more than 100 tons in 2008.

We can read from the quote the PBOC uses the same basis equation (for the sake of simplicity I left stock carry-over out), which not only confirms once again that SGE delivery equals Chinese demand, it also confirms everything I’ve just stated about the structure of the market. Or the equation the PBOC presents us would not hold. Because fresh gold must be sold over the SGE and bars cant return to the SGE vaults without being counted as scrap, SGE delivery – fresh gold = scrap. Especially note “In theory, the gap of 148.082 tons was filled by recycled gold”.  The PBOC calculates scrap by subtracting import and mine from SGE delivery.

The PBOC has designed the Chinese gold market like it is to centrally monitor and track all fresh gold entering China – a side effect is that we are handed the same tools. Fresh gold supply is controlled by the PBOC because it complements total reserves held amongst the population, one of the objectives of the central bank. China is granted to be supplied by fresh gold of the finest quality.

WGC Demand vs True Demand

As exposed in part one, GFMS (who provides the data for WGC demand trends) and the PBOC calculate demand on different levels. For example, GFMS measures newly-made jewelry, the PBOC measures the gold jewelers’ purchases at the SGE; hence some differences in jewelry demand. The same can be seen on the supply side, GFMS doesn’t measure the bars that are remelted to supply the SGE as scrap, where the PBOC does measure this as scrap. Narrow versus broad measurements. However, these differences do not explain the great disparity in total demand.

The big difference in total Chinese gold demand measured by Thomson Reuters GFMS and the PBOC is caused by net investment, disclosed by the PBOC as demand category six in the China Gold Market Reports. The other categories, jewelry, coin, bar and industrial, roughly coincide. So what is net investment?





I had a phone call with the SGE a few weeks ago after which everything fell into place. The employee I spoke to told me net investment relates to gold withdrawn from the vaults by individual account holders. From here we can connect the remaining dots. According to my analysis the PBOC uses the net investment demand category to suppress demand from other categories – mainly bar hoarding.

As we all know the Chinese are very secretive about their gold dealings. China is one of the few countries that doesn’t publish its gold trade in regular customs reports and the PBOC updates their official gold reserves just once every six years. China likes to hoard in the dark, this is typical if you understand the Chinese mindset.

Around 2008 the State Council realized gold was more important than thought in 2002. They wanted to accelerate gold hoarding without drawing too much attention and without altering the structure of the market set up six years before. For this new strategy they commenced manipulating net investment numbers on the demand side and scrap on the supply side. Since 2007 SGE delivery remained equal to Chinese demand, though in the gold reports jewelry and bar demand was being suppressed by gushy net investment, and import was suppressed by overstated scrap (see overview chart above). Apparently GFMS was mislead by the PBOC to treat net investment as stock movement change at jewelers and the mint.
Have a look at some numbers from the past years I have collected from the gold reports and GFMS:





The numbers in red can be disputed. We can see net investment jumping from 18 tons in 2007, to 129 tons in 2008. From 2008 until 2013 net investment in total is over 2000 tons. GFMS’ statement about net investment being stock movement change is untenable.

From 2002 to 2007 scrap numbers from the PBOC and GFMS were equal. Then in 2008 PBOC scrap jumps nearly 80 tons from GFMS scrap, in 2011 the difference reaches 282 tons. These numbers are hard to swallow. Also bear in mind not all gold that enters Chinese refineries ends up at the SGE, as some is made into wire or powder for jewelry and industrial purposes. For these reasons I highly doubt PBOC scrap numbers since 2008.

Scrap numbers were overstated to suppress imports, this scheme cracked in 2011. Hong Kong net exported 335 tons of gold to the mainland in 2011, transcending the 277 tons the PBOC claims to have net imported that year. Implying import must have been more than 277 tons, and thus scrap must heave been less than 407 tons.

In the China Gold Market Report 2011 import is disclosed as others.

2013 Total Chinese Demand

With a few weeks left on the calendar we can safely calculate total demand and supply numbers for 2013. WGC calculates Chinese demand will be roughly 1100 tons, SGE delivery will be 2192 tons.




The difference in the chart can be read as net investment, accounting for 1000 tons in 2013. Im curious how the PBOC is going to hide this demand in the China Gold Market Report 2013, if ever released, the China Gold Market 2012 has never been released either.

Suppose scrap supply is what the reports claim it is. Lets say 300 tons for 2013 (in 2011 it was 400 tons on record high gold prices). These would be the annualized numbers:

2146 tons  SGE delivery
410 tons mine
300 tons scrap
———————      -
1436 tons net import

Is that all? No. This excludes PBOC purchases of 500 tons (I have been told by all my sources the PBOC does not buy 1 gram of gold through the SGE) and jewelry imports from Hong Kong by mainland tourists – a phenomenon I will discuss in a future post. 2013 total Chinese demand including PBOC purchases will be well over 2500 tons and net import will likely reach 2000 tons.


http://www.silverdoctors.com