Tag Archives: Shanghai Futures exchange

The Value-added Tax System In China’s Domestic Gold Market

Important for a thorough understanding of the Chinese domestic gold market – the largest physical gold market globally – is the local Value-added Tax (VAT) system.

In the Gold Survey 2016 by Thomson Reuters GFMS there is a complex illegal scheme described whereby criminals obtain VAT invoices from the Shanghai Gold Exchange (SGE) for tax evasion. According to GFMS this scheme is one of the reasons why SGE withdrawals are significantly higher than “Chinese consumer gold demand”. To be able to properly clarify this scheme I will first expand on the workings of the VAT system in China’s Gold Market in this article. The scheme has certainly existed for years, but not anywhere near the volume and frequency GFMS portrays.

The Current VAT system in China was adopted in 1994 as part of the economic reform and is often regarded as one of the most complex systems in the world. Here the discussion is simplified somewhat, not to get entangled in details that are not important. Be aware this article does not discuss income tax.

The General VAT System In China 

China’s VAT is chargeable on the sale of goods, provision of processing and repair services, and the importation of goods. The standard VAT tax rate is 17 %, a couple of household necessities enjoy a preferential 13 % VAT rate. When visiting any shop or supermarket in China, you will never see any VAT disclosed separately from the unit price. In China it’s common practice to show customers VAT-inclusive prices. In addition, all the prices listed on China’s Commodity Exchanges, the Shanghai Futures Exchange, Dalian Commodity Exchange, Zhenzhou Commodity Exchange and Shanghai Gold Exchange, are VAT-inclusive prices. As a result, if you see a notepad computer priced at 3,510 CNY (onshore renmibi) in China, the VAT is 510 CNY and the VAT-exclusive price is 3,000 CNY.

The “VAT-liable entities” are responsible for collecting the VAT and hand in the money to the tax authority. The VAT-liable entities in China are divided into two categories: general VAT taxpayers and small-scale VAT taxpayers. General VAT taxpayers are large firms that have annual sales large enough and the ability to maintain an accounting system sophisticated enough to accurately calculate output VAT and input VAT. Small-scale VAT taxpayers are firms that don’t satisfy these criteria. Since small-scale VAT taxpayers are not relevant to our discussion, so the focus will be put on general VAT taxpayers.

The formula for computing the VAT payable to the tax authority for a general VAT taxpayer is:

VAT payable = output VAT – input VAT

Output VAT = current period taxable sales * applicable VAT rate

Input VAT = current period costs of eligible purchases * applicable VAT rate

Here is a small example to illustrate VAT computing. Suppose company A is a laptop wholesaler that purchases laptops from Dell, and re-sells them to local retailer B. Company A buys 100 laptops from Dell at the VAT-exclusive unit price of 3,000 CNY. The total VAT-exclusive amount for the goods is 300,000 CNY and total VAT is 51,000 CNY.

VAT-exclusive amount for laptops = 3,000 * 100 = 300,000 CNY

VAT = 3,000 * 100 * 17 % = 51,000 CNY

Dell then issues a VAT invoice on which the 300,000 CNY and 51,000 CNY are recorded.

From Dell’s perspective, the 51,000 CNY is Dell’s output VAT, but from company A’s perspective the 51,000 CNY is its input VAT.

After having bought the laptops from Dell, company A then re-sells them to retailer B at the VAT-exclusive unit price of 4,000 CNY. Implying, the total VAT-exclusive amount for the laptops is 400,000 CNY and the total VAT is 68,000 CNY.

VAT-exclusive amount for laptops = 4,000 * 100 = 400,000 CNY

VAT = 4,000 * 100 * 17 % = 68,000 CNY

Company A then issues to retailer B a VAT invoice on which the 400,000 CNY and 68,000 CNY are recorded. From company A’s perspective, the 68,000 CNY is its output VAT but from retailer B’s perspective the 68,000 CNY is its input VAT.

At the end of the month, the VAT payable by company A is 17,000 CNY, which is to be paid to the tax authority.

VAT payable by company A = output VAT – input VAT = 68,000 – 51,000 = 17, 000 CNY

Company A has to keep Dell’s VAT invoice safe and demonstrate the invoice to the tax authority. If company A couldn’t produce Dell’s invoice to the tax authority, then the 51,000 CNY wouldn’t be allowed to be deducted and company A would have to pay the tax authority 68,000 CNY.


They are four kinds of receipts and invoices in China we will discuss:

  1. Special VAT invoice (SVI)
  2. Customs office special receipt for the payment of import VAT
  3. General VAT invoice
  4. Shanghai Gold Exchange invoice (SGE invoice)

In order for input VAT to be used as a tax credit to offset the output VAT, the input VAT must be substantiated by a “special VAT invoice” (SVI) or “customs office special receipt for the payment of import VAT”. SVIs are issued when a general VAT taxpayer sells taxable goods and services. General VAT taxpayers must purchase blank SVIs from the tax bureau. In China, entities can’t produce any VAT invoice of their own – or it will be fake – but all transaction nee to be recorded through an invoice. An SVI looks like this:

Exhibit 1. Special VAT invoice (SVI): 上海增值税专用发票 Shanghai SVI, 开票日期 Invoice issuance date, 购买方 Purchaser, 名称 Name, 纳税人识别号 Taxpayer code, 地址,电话 Address, telephone, 开户行及帐号 Bank & bank account number, 密码区 Secret code area, 货物,应税劳务及服务 Goods, taxable labour and services, 规格型号 Type, 单位 Unit, 数量 Quantity, 单价 Unit Price, 金额 Amount, 税率 VAT Rate, 税额 VAT amount, 合计 Total, 价税合计(大写)Sum of price and VAT (in traditional Chinese characters), 小写 In Arabic numbers, 销售方 Seller, 备注 Note, 收款人 Payee, 复核人 Double-checked by, 开票人 Invoice issuer.

A “customs office special receipt for the payment of import VAT” is used for imported goods. Suppose company A buys a computer from Australia at the price 10,000 CNY, assuming no tariffs. The exporter in Australia can never give company A a Chinese SVI, but the imported computer does enjoy VAT. Therefore company A must pay the Chinese Customs Office 1,700 CNY (10,000 CNY * 17 %). Upon receiving the money, the Chinese customs office will issue a “customs office special receipt for the payment of import VAT”. With this special receipt, company A can obtain the tax credit (input VAT) from the imported computer.

A VAT general invoice looks like this:

Exhibit 2. General VAT invoice: 上海增值税普通发票 Shanghai general VAT invoice.

A general VAT invoice looks very similar to an SVI, though a general VAT invoice cannot be used in obtaining VAT credits when calculating payable VAT. In other words, if you declare to the tax authority that you have 1,000 CNY input VAT but can only produce a general VAT invoice to substantiate your declaration, the tax authority will not recognize the invoice. General VAT invoices are issued by general VAT taxpayers strictly for accounting purposes when they make sales to consumers that will not use the purchase for input VAT. Effectively, general VAT taxpayers issue SVIs for sales to other general VAT taxpayers, and general VAT invoices for sales to consumers.

The “Shanghai Gold Exchange invoice”, or SGE invoice, is designed by the Shanghai Gold Exchange under the supervision of the national tax authority. It’s a pity I can’t find an image of a SGE invoice.

VAT Policy For Gold In China

In China, gold is divided in several categories. There are gold, gold products and ore, and gold is subdivided in standard gold and non-standard. Gold is unwrought/unforged gold, like bars and ingots (HS code 7108120000 and 7108200000). Standard gold refers to gold bars or ingots having a fineness of 9999, 9995, 999 or 995, and a weight of 50g, 100g, 1kg, 3kg or 12.5kg. On the Shanghai Gold Exchange and the Shanghai Futures Exchange (SHFE) only standard gold can be traded. Non-standard gold includes any gold that doesn’t satisfy standard gold criteria, in example 200g ingots. Gold products mean semi-finished gold and finished products of gold, like coins, jewelry and ornaments.

When gold producers and gold traders (general VAT taxpayers and small scale VAT payers) sell non-standard gold off-SGE the VAT is exempt. Gold imported into the domestic market (non-standard and standard gold), for the ones that have an import license, is also VAT exempt.

If standard gold is not sold through the Shanghai Gold Exchange (or Shanghai Futures Exchange), a 17 % VAT tax rate will apply. If standard gold is sold through the Shanghai Gold Exchange (or the Shanghai Futures Exchange), then the VAT is exempt. But it’s the invoicing procedure that is quite complex. An example will follow to illustrate the whole process.

Exhibit 3. For gold products, the VAT rate depends on the exact gold products you sell or import, it can be different from 17 %.

Let’s tie everything together. Suppose the following trades occur. ICBC imports 1 kg of Au99.99 (SGE 1 Kg 9999 gold ingot), which is standard gold, from Switzerland at the price of 230 CNY/gramme (around 1,033 USD/oz). ICBC then sells the gold on the SGE at the price of 234 CNY/gramme. Jewelry manufacturer Laofengxiang is on the other side of the trade. Laofengxiang then withdraws the gold, makes it into gold ornaments, and sells all of them to a retailer at the VAT-exclusive price of 300 CNY/gramme. The VAT payable and receipts and invoices of different parties are as follows:


When ICBC imports the gold, it receives a “customs office special receipt for the payment of import VAT”. On this receipt the total VAT-exclusive amount for the gold is 230,000 CNY and the VAT is 0 (ICBC’s input VAT), because imported standard gold is VAT exempt. When ICBC sells the gold at the price of 234 CNY/gramme on the SGE, it needs to issue to the SGE a general VAT invoice, on which it’s recorded 234,000 CNY for the gold and 0 VAT (ICBC’s output VAT), because selling standard gold on the SGE is also exempt from VAT. Upon issuing the general VAT invoice, ICBC will receive an SGE invoice from the exchange.

ICBC VAT payable = output VAT – input VAT = 0 – 0 = 0


After ICBC and Laofengxiang have concluded the deal, the SGE will issue both ICBC and Laofengxiang an SGE invoice respectively. After Laofengxiang withdraws the gold from the vault, the tax authority will issue a SVI on behalf of the SGE, which the SGE distributes to Laofengxiang. On the SVI, the total VAT-exclusive amount for gold is 200,000 CNY and the amount of VAT is 34,000 CNY. The tax authority decides these two numbers using the following formula:

The total VAT-exclusive amount for gold on the SVI = SGE transaction price * quantity / (1+17%) * 100 % = 234 * 1,000 / (1+17%) * 100% = 200,000 CNY

The VAT amount for gold on the SVI = SGE transaction price * quantity / (1+17%) * 17 % = 234 * 1,000 /(1+17%)* 17 % = 34,000 CNY

To understand the reasoning behind this calculation, please note that after withdrawing the metal, this standard gold leaves a VAT exempt environment (the SGE system), for an environment that is not exempt from VAT, and hence VAT is born into existence. When Laofengxiang doesn’t withdraw the gold, the SGE invoice is the only invoice it will receive for accounting purposes – Laofengxiang needs some evidence for accounting entries. If it withdraws the gold, then it will receive an SVI because the standard gold withdrawn can be manufactured into new gold products and sold off-SGE. Therefore Laofengxiang will need to claim input VAT. General VAT taxpayers that withdraw will get a SVI, individuals that withdraw form the SGE will not. The input VAT noted on Laofengxiang’s SVI from the SGE is not an amount Laofengxiang paid to ICBC as VAT, but Laofengxiang is allowed to deduct this amount from its output VAT.


As mentioned, after concluding the purchase of 1kg 9999 gold on the SGE at the price of 234 CNY/gramme, Laofengxiang receives an SGE invoice and also an SVI after it withdraws the gold. The input VAT is 34,000 CNY, which is described above. Laofengxiang then fabricates and sells all the gold ornaments made from the 1kg of gold at the VAT-exclusive price of 300 CNY/gramme. Therefore the output VAT is 51,000 CNY.

Output VAT = ornaments sales price * quantity * 17 % = 300 * 1,000 * 17 % = 51,000 CNY

VAT payable = output VAT – input VAT = 51,000 – 34, 000 = 17,000 CNY

Therefore, the VAT payable for Laofengxiang is 17,000 CNY. Since Laofengxiang has the SVI from the SGE, the tax authority will accept the 34,000 CNY input VAT as a tax credit to deduct from the output VAT.

Up till now, readers will have a general idea on how the VAT system works in China’s gold market.

Will The Shanghai International Gold Exchange Facilitate Gold Inclusion Into The SDR?

The Shanghai International Gold Exchange (SGEI) was launched in September 2014, to internationalize the Chinese gold market and the renminbi. The timing of the launch is quite remarkable though, in the context of changes in the international monetary system (IMS).

2015 is likely to force a major shift in the IMS. Two developments are worth watching, the SDR basket will be reviewed, the renminbi will probably be adopted later this year, and the rise of the Asian Infrastructure Investment Bank (AIIB), an international financial institution proposed by China with many Western members; currently France, Germany, Italy, Luxembourg, Switzerland, New Zealand and the UK. Both developments are severe blows to the US dollar hegemony.

Last week I reported on, (i) the IMF terms for the renminbi to be adopted into the SDR, (ii) if these terms can be met this year, and (iii) what the role of gold will be in the process (read China, Gold, SDRs And The Future Of The International Monetary System). Since then there has been more confirmation of renminbi adoption in the media.

From Reuters:

China’s yuan at some point would be incorporated in the International Monetary Fund’s Special Drawing Right (SDR) currency basket, IMF Managing Director Christine Lagarde said, …”It’s not a question of if, it’s a question of when,”

From Xinhua:

China and Germany conducted their first high-level financial dialogue here on Tuesday and agreed to strengthen macro-economic policy coordination

…confronted with a complex and fragile global economic situation, China and Germany as important economies should strengthen policy coordination, coordinate strategic cooperation, deepen financial and fiscal cooperation…

Representing Germany at the dialogue, German Finance Minister Wolfgang Schaeuble and Deutsche Bundesbank President Jens Weidmann said that Germany and China have been working together very well both bilaterally and multilaterally in financial and fiscal areas…

According to a joint statement after the dialogue, the German side will actively support … China’s goal to add the RMB to the special drawing rights (SDR) currency basket based on existing criteria.

…During the dialogue, both sides reached consensus on issues such as investment cooperation between China and Europe, China and Germany and in third countries.

Kindly note, Germany officially has the second largest gold reserves in the world and are currently repatriating gold from the US. Thereby expressing their affinity with gold and their lack of trust in the US as their custodian. This Germany would like the renminbi to be included into the SDR.

The most important condition for the adoption of the renminbi is that it must be freely usable. From Criteria for Broadening the SDR Currency Basket, an IMF paper published in 2011, “that discusses a number of reform options for the eligibility criteria for the SDR currency basket”:

The freely usable concept and its two key elements—currencies should be “widely used” and “widely traded” —are set out in the Articles and serve important operational purposes.

The renminbi is currently “widely used” and “widely traded”.

Will Gold Be Included In The SDR Basket? 

China gold x

The reason the current IMS is up for revision is because the global fiat experiment has failed miserably. Having exclusively fiat currencies circulating within countries, without any anchor to a non-fiat reserve currency, is simply not sustainable. In shaping a new IMS the designers would be mistaken to create a system based on a basket of solely fiat currencies, which have just proven to be ineffectual. Gold could provide credibility and strength to the SDR.

In addition, we could read some clues (in my prior post) that the Chinese would like gold in the SDR along side the national fiat currencies. This would explain China’s aggressive gold purchases in recent years.

On March 9, 2015, Albert Cheng, managing director of the World Gold Council Far East, was interviewed by ShanghaiDaily.com:

Q: The council has signed an understanding agreement with the Shanghai Gold Exchange to work more closely via the International Board set up in the city’s pilot Free Trade Zone last September. Could you tell us how that will work?

A: The memorandum of understanding involves objectives to improve operation of the Shanghai Gold Exchange, such as attracting more international players. Gold is a hard currency, so if it is freely traded in China, it will have an impact on the yuan. The design of the International Board, allowing international and domestic investors to participate in the onshore gold market, has a symbolic meaning of some kind of convertibility. By signing the memorandum, we can help the Board marketing this concept to the international trading community.

In general the renminbi is not yet fully convertible, but in terms of gold it is; through the Shanghai International Gold Exchange. Logically all currencies in the SDR basket must be freely usable, and allowed to be freely exchanged for one another. If the renminbi and gold were to be added to the SDR basket it would help if there is an exchange for both, which is currently operating in the Shanghai Free Trade Zone.

Will the Shanghai International Gold Exchange facilitate gold inclusion into the SDR?

SGE Withdrawals 45t Week 9, YTD 456t

Chinese wholesale gold demand, that equals withdrawals from the vaults of the Shanghai Gold Exchange (SGE), accounted for 45 metric tonnes in week 9 of 2015 (March 2 – 6). Year to date 456 tonnes have been withdrawn from the SGE vaults. An estimate suggests 340 tonnes has been net imported into the Chinese domestic gold market over this period (calculating with a yearly SGE scrap rate of 250 tonnes).

Screen Shot 2015-03-14 at 8.47.03 PM
Blue (本周交割量) is weekly gold withdrawn from the vaults in Kg, green (累计交割量) is the total YTD.

Since the inception of the Shanghai International Gold Exchange (SGEI) there was a possibility the significance of SGE withdrawals, as published in the Chinese weekly reports, became distorted by activity on the SGEI – in the Free Trade Zone. That’s why I corrected SGE withdrawals by trading volume from the SGEI, just to be on the safe side of measuring Chinese wholesale demand.

However, we just learned that what was traded and withdrawn on the SGEI in 2014 was primarily imported into the Chinese domestic gold market. So, for the time being we can assume SGE withdrawals are still an accurate proxy for Chinese wholesale demand – a metric described in this post.

Shanghai Gold Exchange SGE withdrawals delivery 2015 week 9 dips

Shanghai Gold Exchange SGE withdrawals delivery only 2014 - 2015 week 9

I like to note SGEI trading volume has jumped recently, reaching a record in week 9 at 34 tonnes (counted unilaterally). Perhaps this is exchange is slowly coming to life.

Shanghai International Gold Exchange SGEI weekly gold trade volume

Only the 1kg physical contract iAu99.99 is traded on the International Board (SGEI), there seems to be nil interest in the 100 gram physical contract iAu100 and in the 12.5kg (London Good Delivery bars) contract iAu995.

Overall SGE volume is somewhat dropping as the spot deferred contracts Au(T+N1) and Au(T+N2) are falling back after a resurrection that started late November 2014.

SGE weekly gold volumes

On the Shanghai Futures Exchange (SHFE) we can see the same trend; slightly dropping volumes. Nothing “worth mentioning”.

COMEX vs SHFE gold volume and open interest

Booming SGE Withdrawals In Week 2, 2015: 70 Tonnes

Withdrawals from the vaults of the Shanghai Gold Exchange (SGE) in week 2 of 2015 (12 – 16 January) accounted for an incredible 70 metric tonnes. Aggregated withdrawals in the first two weeks of this year stand at 131 tonnes.

Shanghai Gold Exchange SGE withdrawals delivery 2015 week 2, dips

Shanghai Gold Exchange SGE withdrawals delivery only 2014 - 2105 week 2, dips

Corrected by the volume traded on the Shanghai International Gold Exchange (SGEI), withdrawals in week 2 were at least 65 tonnes (read this post for a comprehensive explanation of the relationship between SGEI trading volume and withdrawals). Year to date withdrawals corrected by SGEI volume were at least 122 tonnes.

The numbers just mentioned are truly amazing, 70 tonnes withdrawn in one week is the third highest amount ever. Only in January 2014 when the Chinese were also buying gold for the Lunar year – but the gold price in renminbi was lower, and in April 2013 when the price of gold fell of a cliff, were withdrawals stronger than last week. This is important, as illustrated in the charts above the Chinese tend to buy gold when the price is declining, last week they bought like there was no tomorrow while the price was rising sharply. Now that’s strong demand! Perhaps some investors in the mainland read the recommendations from ICBC, world’s largest bank, regarding physical gold hoarding:

ICBC gold buy reccomendations

In perspective; 65 tonnes demand (the bottom limit) can only have been met by mine supply, scrap supply or import supply. Domestic mine production was 8.7 tonnes; gold was not trading at a discount, but at a premium to London last week, which means scrap couldn’t have been abundant; estimating scrap that supplied the SGE at 4 tonnes leaves import to have been at least 52.3 tonnes (in one week). Nothing unusual if this would occur sporadically, but since 2013 China has net imported 2,838 tonnes for just non-government demand, continuously draining global above ground gold inventory – as world mine production is not sufficient. How long can this go on? Deutsche Bank estimates the PBOC imports an additional 500 tonnes a year, according to a report released in November 2014:

…But there have been a number of examples of publicly flagged large-scale official gold transactions that have had a limited market impact. In the IMF example above, gold prices rose steadily despite the IMF being a reliable seller of almost 20 tonnes each month. In another example, the Chinese government’s open market purchases of roughly 500 tonnes per year have not prevented the gold price from plummeting in recent years.

The world Gold Council (WGC) estimates there is about 170,000 tonnes of above ground gold. In my opinion it’s impossible to know how much gold has been mined in the history of humanity, though I suspect it’s more than 170,000 tonnes, also because of what we are witnessing these years regarding amounts of gold moving from West to East – the WGC started counting from 10,000 tonnes since the Californian gold rush. 

The Shanghai International Gold Exchange

To my advantage for estimating Chinese wholesale demand (that equals SGE withdrawals), SGEI trading volume has been insignificant since the SGEI was launched in September 2014. SGE management of course was aiming for substantially more volume at their new subsidiary. In order to boost liquidity they took a bunch of measures. On December 29, 2014, the SGE announced free storage and no load-in and load-out fees from January 1 to June 30, 2015.

All international members and customers:       

With a view to encouraging international members and customers’ participation in trading and delivery activities on the International Board and meanwhile reducing their cost, the Shanghai Gold Exchange determines to further exempt international members and customers from fees including inventory fees, load-in and load-out fees, vault transfer fees and other service fees generated from trading contracts listed on the International Board. The exemption period shall be valid from January 1st to June 30th, 2015.  

Two days later they exempted traders from paying transaction fees on the SGEI physical gold contracts iAu99.99, iAu99.5 and iAu100g.

All Members,

With a view to promoting the liquidity and enhancing the investment function of Au(T+N) products, the Shanghai Gold Exchange (the “Exchange”) determines to reduce the transaction fees of Au(T+N1) and Au(T+N2) by 50%, from the current 2‰ to 1‰. In addition, the Exchange shall also exempt all its members from transaction fees of contracts listed on the International Board including iAu99.99, iAu99.5 and iAu100g, so as to boost the trading activities on the international board. 

The above-mentioned preferential policies shall be valid from January 1st to June 30th, 2015.

Then on January 15, they decided to collaborate with the WGC to promote SGEI trading:

Today, the Shanghai Gold Exchange and the World Gold Council, the market development organization for the gold industry, signed a ‘Memorandum of Understanding’ regarding a ‘Comprehensive Strategic Cooperation Agreement.’ The Shanghai Gold Exchange is the largest physical gold exchange worldwide and the World Gold Council is the global authority on the gold industry. Together, these two organizations are joining hands to support the development of both domestic and international gold trading in China by leveraging the opportunity provided by the internationalization of the Chinese gold market, through the Shanghai Free Trade Zone, to support market expansion. The agreement will support the development of gold investment products and solutions for the industry and investors both regionally and globally.

I’m holding my breath on the collaboration with the WGC. In my experience they could have started by making the SGEI more accessible. Since September I was trying to become a customer through a number of Chinese banks, but I didn’t succeed. Enrollment wasn’t particularly easy.

Gold Trading Volumes

Total SGE trading volume has been declining for a few weeks, in week 3 (January 19 – 23) volume accounted for 238 tonnes, down 19 % w/w.

Shanghai Gold Exchange SGE weekly gold volume

Volume on the Shanghai Futures Exchange is moving in the opposite direction, volume has been increasing since December 26. In week 3 volume was 778 tonnes, up 10 % w/w. The open interest closed at 124 tonnes at the end of the week.

On the COMEX 3,054 tonnes of gold in futures contracts changed hands, down 13 % w/w. The open interest closed at 1,403 tonnes.

COMEX vs SGE + SHFE gold volume

Yearly Shanghai Silver Volume Transcends COMEX Again, SGE Withdrawals Nearly 2,100t

Happy New Year from the BullionStar team!

In 2014 silver futures traded on the Shanghai Futures Exchange (SHFE) accounted for 2,908,168 tonnes. On the COMEX 2,123,387 tonnes were traded, 37 % less than in Shanghai. 

First let’s have a look at the latest SGE trade report of week 52 (December 22 -26). Total SGE gold withdrawals was a staggering 58 tonnes in week 52, year to date (until December 26) SGE withdrawals have reached 2,073 tonnes. With three trading days left (December 29 – 31) total withdrawals are 124 tonnes shy of the 2013 record (2197 tonnes). The possibility 2014 withdrawals will transcend 2013 is small, though 2014 has once again been an incredible strong year for Chinese gold demand.

Regular readers of this blog are used to the tonnage being withdrawn from the SGE vaults every week, often more than 40 tonnes (in one week). The fact the mainstream media, or the World Gold Council, CPM Group or Thomson Reuters GFMS, still don’t report these numbers is getting weirder by the day.

Because gold bullion export is prohibited in china, we know by tracking SGE withdrawals, fairly accurate, how much gold is being added to Chinese non-government gold reserves. This year that amount will be about 1,700 tonnes.

Screen Shot 2014-12-31 at 4.43.44 PM
Blue (本周交割量) is weekly gold withdrawn from the vaults in Kg, green (累计交割量) is the total YTD.

Some SGE data lags one week, some not; in this post all gold data is up to week 52 (December 26).

Corrected by trading volume on the Shanghai International Gold Exchange (SGEI) – read this post for a comprehensive explanation of the relationship between SGEI trading volume and withdrawals – SGE withdrawals in the mainland, that equal Chinese wholesale demand, were at least 44 tonnes, at most 58 tonnes. Year to date SGE withdrawals in the mainland were at least 2,006 tonnes, at most 2,073 tonnes.

Shanghai Gold Exchange SGE withdrawals delivery 2014 week 52, dips

Shanghai Gold Exchange SGE withdrawals delivery only 2014 week 52, dips

My best estimates for the supply side of SGE withdrawals (2,006 tonnes):

  • Domestic mining 450 tonnes.
  • Import 1,206 tonnes.
  • Recycled gold through the SGE 350 tonnes.

East – West Precious Metals Markets Comparison

Let us have a look at size of the precious metals (paper) markets in China relative to the COMEX.

SGE gold trading volume saw a remarkable lift-off this year, most likely because 8 SGE contracts were allowed to be traded by foreign investors.

Trading Privileges of the Shanghai Gold Exchange

Total volume traded in 2013 on the SGE was 5,807 tonnes (counted unilaterally). In 2014 volume has already surpassed 8,982 tonnes; an amplification of at least 55 % y/y.

Total volume traded in week 52 was 371 tonnes, down 10 % w/w.

Shanghai Gold Exchange SGE weekly gold volume

Volume on the two largest gold futures exchanges on earth (COMEX and the SHFE) have been low in week 52. On the Shanghai Futures Exchange (SHFE) volume in week 52 dropped 56 % w/w, to 344 tonnes. On the COMEX weekly volume dropped 54 % w/w, to 1,152 tonnes (the COMEX trading week counted only four days).

COMEX vs SGE + SHFE gold volume

The Open Interest (OI) on the SHFE closed December 26 at 101 tonnes, on the COMEX at 1,158 tonnes. The total OI on the SGE of all gold deferred contracts combined – Au(T+D), mAu(T+D), Au(T+N1) and Au(T+N2) – stood at 109 tonnes on December 26.

COMEX vs SHFE gold volume and open interest

Let’s have a look in the silver pit. For silver we have all the data of all exchanges (SGE, SHFE, COMEX) for 2014 complete.

SGE silver volume in 2014 shows less growth relative to gold, probably because silver contracts aren’t allowed to be traded by foreigner investors. Total silver volume traded on the SGE in 2013 accounted for 215,250 tonnes, in 2014 it was 252,306, so it’s up 17 % y/y.

In week 52 SGE silver volume was down 49 % w/w, at 8,602 tonnes.

Shanghai Gold Exchange SGE weekly silver volume

Total silver volume on the COMEX has dropped 2.5 % in 2014 relative to 2013. Total volume on the SHFE has increased 14 % compared to 2013.

Total volume traded on the COMEX in 2013 was 2,176,519 tonnes; the SHFE traded 2,557,430 tonnes in silver futures, 18 % more.

In 2014 the COMEX has traded 2,123,387 tonnes of silver futures, the SHFE 2,908,168 tonnes, 37 % more. 

COMEX vs SHFE silver volume yearly

COMEX vs SGE + SHFE silver volume

The OI on the COMEX closed at December 31, 2014, at 23,264 tonnes, up 27 % y/y. The OI on the SHFE closed at 3,052 tonnes, down 39 % from a year earlier.

COMEX vs SHFE silver volume and open interest

The OI of the deferred SGE contract Ag(T+D) closed on December 31 at 2,471 tonnes, up 25 % y/y.

Silver inventory at the SGE dropped 8 % y/y, to 103 tonnes. Silver inventory on the SHFE dropped 71 % y/y, to 123 tonnes. Note, there are many other (spot) silver exchanges in China, these inventories don’t mean that much. SHFE inventory has been emptied because the cash and carry trade closed (read this post for a simplified explanation) when the silver futures curve on the SHFE went from contango to backwardation.

SHFE & SGE silver inventory, December 26, 2014

Currently the futures curve on the SHFE is in contango,

SHFE silver futures curve contango December 31, 2014

…which caused the discount of silver in the mainland to increase relative to London spot.

Shanghai Gold Exchange SGE silver premium

Silver export from China enjoys 17 % VAT, hence the discount is not arbitraged. (for more information on the structure of the Chinese silver market read this post).

SGE Withdrawals A Whopping 61t In Week 51, YTD 2016t

Withdrawals from the Shanghai Gold Exchange (SGE) came in very strong in week 51 at 61 tonnes, year to date the counter has reached 2016 tonnes.

Screen Shot 2014-12-27 at 12.18.55 PM
Blue (本周交割量) is weekly gold withdrawn from the vaults in Kg, green (累计交割量) is the total YTD.

Some SGE data lags one week, some not; in this post all data is up to week 51 (December 19).

Withdrawals from the vaults of the SGE captures Chinese wholesale demand, however, to get a more precise view on demand we have to add SGEI volume to the equation (read this post for a comprehensive explanation on the relationship between SGE withdrawals and volume on the Shanghai International Gold Exchange – SGEI). If we subtract SGEI volume from SGE withdrawals, at least 51 tonnes was withdrawn in week 51, at most 61 tonnes; year to date, at least 1,963 tonnes was withdrawn, at most 2,016 tonnes.

I could speculate on why Chinese wholesale gold demand is likely to be more in the area of the upper limit or bottom limit, fact is I have little evidence to back it up; all I know at this stage is that it’s somewhere in between.

Shanghai Gold Exchange SGE withdrawals delivery 2014 week 51, dips

Last week I wrote I expected withdrawals to be strong in the coming weeks, as December and January are seasonally the strongest months, but the Chinese are often aiming to buy their physical on the dips. In week 49 and 50 withdrawals were a bit held back because of the rising price of gold in renminbi. In week 51 the price was declining, so withdrawals were up.

Shanghai Gold Exchange SGE withdrawals delivery only 2014 week 51, dips

Year to date SGE withdrawals – 1963 tonnes, the bottom limit – were supplied by (my best estimates):

  • 442 tonnes mine production
  • 1,172 tonnes import
  • 349 tonnes recycled gold

If we use the upper limit – 2016 tonnes, import and/or recycled gold had to be more.

SGE premiums have been hovering in between 0.51 and 0.76 % above London spot throughout week 51.

Total SGE (gold) trading volume was down 14 % from the previous week at 410 tonnes. The uptrend is still intact as we can clearly see from the next chart.

Shanghai Gold Exchange SGE weekly gold volume

On the Shanghai Futures Exchange (SHFE) volume traded in Au futures accounted for 786 tonnes in week 51 (1,196 tonnes SGE + SHFE volume), on the COMEX 2,527 tonnes changed hands.

COMEX vs SGE + SHFE gold volume