The ASIA Miner electronic news service continues this week to provide extracts from Goldletter International"s report on China"s gold industry. In the Third Quarter July-September 2007 issue of The ASIA Miner magazine, we present Marino Pieterse"s overview that China will emerge as the world"s largest gold producer by 2010.

This week we present the topic of China's national gold industry from Goldletter International.

Control and ownership of many of China's largest mines is vested in the State and administrated through the China National Gold Group Corporation (CNGC). It was first established in 1979 and then reorganised in 1993.

GNGC, operating under China Gold Group, controls the major gold mines in seven out of eight main producing provinces. The GNGC officially controls 450 mines and has 61 affiliates across China.

Through the biggest gold producer of the Group, Zhongjin Gold, CNGC contributes 20% of total gold production in China, and shares 30% of total Chinese gold resources. In 2005, CNGC produced 42 tonnes (1.35 million ounces) of gold, a year-on-year increase of 25%.

The one exception to GNGC's jurisdiction is the most important producing province of Shandong, which accounts for 20-25% of Chinese gold production. In Shandong, the largest gold mine Zhaoyuan has an annual production of about 75,000 oz. The Zhaoyuan group consists of nine mines with a total annual output at about 500,000 oz. In Shandong and elsewhere all other production is under the control of provincial, regional or local mining companies. Many operations are collectively run by townships or villages. China refines its own gold and many mines have refineries attached to them.

The buying and selling of gold in China had been centralised since 1983 at ministerial level. All gold production in the country had to be sold to the People's Bank of China (PBC), which as the only official institute, technically controlled mine purchases and sale of gold to retailers.

As well as being the depository of all Chinese miner gold, the PBC was responsible for setting the price paid to the local miners. From 1995, the Chinese domestic gold price was floated at a discount of 10% below the international price, although since 1999 it has more closely tracked the world price.

The move to bring the local gold price in line with the international price occurred from recommendations by the World Gold Council (WGC) in 1998 as part of a timetable for deregulation of the market, motivated by China's acceptance into the World Trade Organisation at the end of 2001.

Between 1949 and 1982, China banned personal ownership of gold, not to mention a gold market. In recent years, China gradually lifted its control over the gold market, by allowing the purchase of gold by individual citizens.

China Gold Association was formally founded in November 2001, with 70 enterprises as standing directors, and 256 enterprises as directors.

The official opening of the Shanghai Gold Exchange (SGE) on October 30, 2002 heralded the start of a new era in the gold market in China, and is further evidence of the intention of the Chinese government to deregulate the precious metals markets. Gold trade volume on the Shanghai Gold Exchange amounted to 905 tons in 2005, up 36% from 2004. Its gold trade volume more than doubled in the last two years to US$ 14 billion.

Government investing in gold mining sector

In the 1980s the Chinese government invested heavily in the gold mining sector. This policy continued and was reinforced under the Eight Five Year Plan from 1991-1995. Government spending increased to US$1.5 billion in 138 specific projects.

The aim of this initiative was to restrict the informal and smaller sectors and consolidate small mines into bigger and more efficient operations. The policy was not successful and by the end of the 1990s investment had fallen to US$12 million annually.

The government stance then became tougher and less supportive. In 1999, it deemed small-scale gold mining unproductive and announced a number of mine closures. In 2002, further restrictions were placed on the working of small mines and refineries. The government has abolished its prospecting fund from this year.

Marino Pieterse was a key presenter at The ASIA Miner Investing in Mining Conference held in Sydney in May. His topic explored the opportunities of investing in gold.

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