This post is part of the Chinese Gold Market essentials series. Click here to go to an overview of all Chinese Gold Market Essentials for a comprehensive understanding the largest physical gold market globally.
Only through general trade gold can be imported into the Chinese domestic gold market where it’s required to be sold first through the Shanghai Gold Exchange (SGE). Gold imported through processing trade must be used for manufacturing or assembling purposes after which the finished goods are required to be exported.
Processing trade is meant for China’s manufacturing industry to efficiently connect with the rest of the world. The Chinese and foreign companies engaging in processing trade are exempt from, in example, import duties and value added tax.
Usually processing trade is conducted through Customs Specially Supervised Areas (CSSAs) – also called Customs Specially Regulated Areas, Special Customs Supervision Areas or Customs Special Supervision Regions, these are all the same. When processing trade is performed outside CSSAs (the rest of the mainland, non-CSSA) the materials will be strictly monitored by Chinese customs. Through processing trade gold cannot enter the Chinese domestic gold market where the SGE operates.
Customs Specially Supervised Areas
CSSA is a collective noun for free trade zones, export processing zones, bonded logistics parks, bonded ports, comprehensive bonded zones, etc. Without going into detail what the differences are between various types of CSSAs, all such areas must be seen as regions in China mainland where rules for taxes, customs and foreign exchange administration can diverge from the rest of the mainland.
Through CSSAs cross-border trade between China mainland and foreign countries can be established without China having to fully open up its borders. By slowly increasing the number of CSSAs and easing cross-border trade rules between these areas and the rest of the world, the State Council gradually allows China to open up. Hong Kong is not a CSSA, but a Special Administrative Region of the People’s Republic of China. In terms of trade Hong Kong must be treated as a separate country from China mainland, having its own customs department and currency.
Some CSSAs are physically open to the rest of the mainland, people are free to go in and out without being asked to show documentation by Chinese customs, others are restricted, surrounded by a fence and goods moved in or out can be subject to checks.
Processing Trade vs General Trade
To study processing trade we’ll use the official PRC Customs Supervision and Administration of Processing Trade Goods Procedures (2004) and Managing Trade & Customs in China (2011, KPMG) as our guides. To avoid misunderstandings, henceforth we’ll work with the nomenclature provided in these documents. According to the PRC Customs Supervision and Administration of Processing Trade Goods Procedures the definition of processing trade is:
“Processing trade” shall refer to the business activity of import of operating enterprises of all or some raw and auxiliary materials, components, parts, mechanical components and packing materials (Materials and Parts) and the re-export thereof as finished products after processing or assembling. It includes processing of supplied materials and processing of purchased materials.
Let’s examine the two types of processing trade to get a better understanding of the wider concept. There is the Processing Of Purchased Materials Model (or Contract Manufacturing model) and the Processing Of Supplied Materials Model (or Toll Manufacturing model).
The Processing Of Purchased Materials Model involves a Chinese manufacturer to import raw materials and parts from abroad into China (a CSSA) to assemble or process into finished goods. Upon completion the finished goods will be exported and sold in an overseas market by the Chinese manufacturer.
The Processing Of Supplied Materials Model involves a foreign company to export raw materials and parts to China (a CSSA) to be processed by a Chinese manufacturer into finished goods. Upon completion the finished goods are exported to an overseas market to be sold at the discretion of the foreign company. This foreign company will pay the Chinese manufacturer a processing fee for its services provided.
Example given of a processing trade with gold: Bullion from Hong Kong is exported to the CSSA in Shenzhen where 4,000 Chinese gold manufacturers are located. Subsequently, the gold is fabricated into jewelry and upon completion imported back into Hong Kong to be sold in jewelry shops. This trade can be either conducted through the Processing Of Purchased Materials Model or the Processing Of Supplied Materials Model.
Essential to understand is that the flow of goods in processing trade is completely separated from the Chinese domestic market, though these goods crossing the Chinese border are included in customs statistics. From the PRC Customs Supervision and Administration of Processing Trade Goods Procedures we can read:
Article 21. Goods imported and exported by operating enterprises in the form of processing trade shall be included in customs statistics.
Though the gold crossing the Chinese border is only included in customs statistics from China’s trading partners, as China has eclipsed its gold trade in its customs data.
Processing trade – and the rules just mentioned – explains how gold can be imported into China from Hong Kong and exported back from China to Hong Kong without entering the Chinese domestic gold market and flowing through the Shanghai Gold Exchange (SGE). Since 2004 traders do not need a license to import/export gold through processing trade into/from China, as was communicated in the People’s Bank of China, General Administration of Customs Announcement No. 19 of 2003 (on the change of gold and its products processing trade regulatory conditions).
As you can see in the chart above there is a difference between gross gold trade and net gold trade, which is caused by processing trade.
Now we understand processing trade, let us move on to study trade between the Chinese domestic market and foreign countries.
If goods are imported into/ exported from the Chinese domestic market this is referred to as general trade. The agency that controls all forms of gold in general trade is China’s central bank, the People’s Bank Of China (PBOC). Only financial institutions and gold enterprises that carry the Import and Export License of the People’s Bank of China for Gold and Gold Products (The License hereafter) can get gold to pass customs into the Chinese domestic gold market. I’ve published the translation of the official Measures for the Import and Export of Gold and Gold Products (The Measures hereafter) drafted by the PBOC in March 2015 – exclusively translated by BullionStar. For the first time these rules are now publicly available in English. From The Measures we can read:
For the import and export customs clearance of gold and gold products as included in the Catalogue for the Regulation of the Import and Export of Gold and Gold Products, the Import and Export License of the People’s Bank of China for Gold and Gold Products (Annex 1) issued by the People’s Bank of China or a People’s Bank of China branch shall be submitted to the Customs.
The Catalogue for the Regulation of the Import and Export of Gold and Gold Products describes all forms of gold (powder, coins, bullion, unwrought, scraps, jewelry) that can cross the Chinese border. For gold to be imported into the Chinese domestic gold market the material is required to be accompanied by The License.
Currently there are fifteen commercial banks that can apply for The License to import standard gold, which in China is bullion weighing 50g, 100g, 1Kg, 3Kg or 12.5Kg, having a fineness of 9999, 9995, 999 or 995. The fifteen commercial banks are:
- Shenzhen Development Bank / Ping An Bank
- Industrial and Commercial Bank of China
- Shanghai Pudong Development Bank
- Agricultural Bank of China
- China Construction Bank
- Bank of Communications
- China Merchants Bank
- China Minsheng Bank
- Standard Chartered
- Bank of Shanghai
- Industrial Bank
- Bank of China
All standard gold imported through general trade into the Chinese domestic gold market is required to be sold first through the SGE (the core of the Chinese domestic gold market). From The Measures we can read [brackets added by me]:
… An applicant for the import and export of gold … shall have corporate status, … it is a financial institution member or a market maker on a gold exchange [SGE] approved by the State Council.
… The main market players with the qualifications for the import and export of gold shall assume the liability of balancing the supply and demand of material objects on the domestic gold market. Gold to be imported … shall be registered at a spot gold exchange [SGE] approved by the State Council where the first trade shall be completed.
Next to standard gold there is non-standard gold, for example bullion bars weighing 1,040 gram, jewelry, coins, ore and doré. Non-standard gold is not required (and not allowed) to be sold through the SGE when imported into the Chinese domestic gold market. Only a very limited number of gold enterprises can apply for The License to import non-standard gold under general trade. Although, The Measures released in March 2015 by the PBOC loosened the requirements for enterprises.
Example given of a gold enterprise that can import non-standard gold into the Chinese domestic gold market: On 26 May 2015 Zijin Mining Group bought a 50 % stake in Barrick Gold Corp’s Porgera mine in Papua New Guinea for $298 million. On 9 October 2015 China Gold Network wrote that Zijin Mining was one of the first mining companies to be granted the qualification by the PBOC to import gold under general trade, allowing Zijin to import doré from Papua New Guinea into the Chinese domestic gold market. Note, if the doré is imported and refined into standard gold, the bars are required to be sold through the SGE.
From China Gold Network:
Translated [brackets added by me]:
On Sept 25, Zijin Mining was granted by the People’s Bank of China the permission to do gold import business [under general trade], which broke the common practice that in China only financial institutions do this business, and became the first case that a big domestic gold miner does gold import business [under general trade].
By loosening the rules for enterprises to import non-standard gold into the Chinese domestic gold market the PBOC has helped Chinese mining companies to strive for more overseas acquisitions.
Above we can see The License form that commercial banks have to submit for every gold import. Being able to apply for The License does not grant unlimited permission to import gold into the Chinese domestic gold market – from abroad or CSSAs – as for every shipment a stamp from the PBOC is needed. From the Measures we can read:
There shall be one Import and Export License of the People’s Bank of China for Gold and Gold Products for each batch of product and the License shall be used within 40 work days since the issuing date.
Gold export from the Chinese domestic market is prohibited by the PBOC (except for golden Panda coins). The reason The Measures mention export is because if the PBOC would ever change its policy in allowing standard gold export from the Chinese domestic market it doesn’t need to rewrite the laws. Currently, if one of the fifteen banks (or Zijin Mining) will submit a request at the PBOC for an export license it will be rejected.
Has anybody ever seen an SGE bar outside China mainland? Likely not. This is because the SGE system operates in the Chinese domestic gold market and thus bars withdrawn from the SGE vaults are prohibited form being exported.
1.上海黄金交易所标准金条 SGE Standard Gold Bar.
2. 上海黄金交易所标志 SGE Logo.
3. 品牌标志 Brand Logo.
4. 金条品牌 Bar Brand (泰山 is Mount Tai, which is produced by Shandong Gold).
5. 成色 Fineness.
6. 重量 Weight.
7. 金条编号 Bar Number.
However, there is one possibility to export an SGE bar from the Chinese domestic gold market. Individuals can bring 50 grams of gold when traveling abroad. Though this rule is not very stringent on the import side, on the export side one individual would be allowed to bring a 50g SGE bar across the border, two individuals would be allowed to bring a 100g SGE bar, etc.
More important, through processing trade enterprises not carrying The License can import gold into/ export gold from China. From The Measures we can read:
…, gold and gold products imported and exported by the following means shall exempted from handling Import and Export License of the People’s Bank of China for Gold and Gold Products and shall be supervised by the customs instead:
(I) Imported or exported by processing trade;
There it is, enterprises can import gold into/ export from China through processing trade without The License from the PBOC – because CSSAs are separated from the Chinese domestic gold market. These enterprises are indeed required to be engaged in gold business, for example, as jewelers or refiners.
Gold trade between a CSSA and the Chinese domestic market is considered as general trade. Meaning, for gold to be imported from the Shanghai Free Trade Zone into the Chinese domestic gold market The License must be provided.