World Gold Council urges China to cut tax to boost trading

The World Gold Council, a producer group supported by the biggest mining companies, is lobbying China to remove a tax on gold trading to boost demand in the world's fastest-growing major economy.

Scrapping the 17 percent value-added tax on sales of gold bars will pave the way for banks to introduce physical trading for individuals, giving them the opportunity to profit from global price moves, Albert Cheng, the Council's Far East managing director, told reporters in Shanghai today.

"We see a huge demand potential given the Chinese people's large bank deposits'', valued at about $2 trillion, Cheng said, adding that he hoped the issue could be resolved this year. China, which is behind India and the US in terms of gold consumption, has partly liberalised its precious metals market since 2002 to allow physical transactions among banks, miners and jewellers. Exchange-traded gold is exempt from the 17 percent VAT.

Gold for immediate delivery reached a 26-year high of $730.40 an ounce in May as investors bought the metal as a hedge against inflation at a time of record energy prices. Gold has since slumped almost 9 percent as oil retreated.

"Chances of prices falling back to $500 could be slim,'' Cheng said. Gold traded at $652.80 at 6:12 p.m. Shanghai time. Gold jewellery consumption in China, including the mainland, Hong Kong and Taiwan, was unchanged last year at about 278 tons, and this year is set to rise as prices have fallen from their peaks, Chen said, without giving a precise forecast. Investment demand rose last year from 2005's 14.8 tons, he said, without elaborating. The size of gold investment demand in China is currently about one-tenth that of India, he added.

China has the world's largest foreign-exchange reserves, including gold, topping $1 trillion by the end of 2006, the People's Bank of China, the nation's central bank, said January 15.

The country held 600 tons of gold, or 1.3 percent of its total foreign reserves, as of July, compared with 8,133.5 tons in the US, the World Gold Council has said. Economists have urged China to diversify its reserves and increase gold holdings.

"I couldn't comment on the timing for China to increase gold holdings, as no one knows when is the best time,'' said Cheng. ``If China does decide to buy gold, it should buy it gradually and at any time to offset price volatilities.''

The London-based World Gold Council plans to launch gold exchange-traded funds, enabling investors to trade without taking physical delivery, in India, Italy, Germany, Belgium and the Netherlands, Chief Executive James Burton said January 12.

The Council's strategy in China is to boost physical transactions among individuals, rather than introduce the securities, Cheng said.