Chinese investors on the hunt for their pot of gold

Beijing (China Daily/ANN) - Having closely monitored the performance of a financial management company for more than four years, Hou Yanjie finally decided to buy a trust product recommended by an account manager she's familiar with. The product requires investment of at least 1 million yuan (US$163,000), and the expected annual rate of return is around 9.5 per cent.

The 30-year-old Beijing-based newspaper editor also invested in a number of funds and bought paper gold - certificates that equate to the physical metal - and paper silver.

She sold the paper silver in early April but is holding on to the paper gold, which is worth about 30,000 yuan. The price of physical gold slid from $1,561 to $1,482 an ounce on April 12 and $1,348 on April 15, and whether it will rise or fall over the long term remains a mystery to her.

"Regular people cannot play the real estate market because the investment threshold is too high. Besides, it's too late to enter that market because prices have skyrocketed in recent years. Now, with the slump in the price of gold, it can only be used as a hedge against inflation rather than an investment. Plus, the stock market is rather depressed. We don't have any channels to make a promising investment with a good return," she said.

The lack of investment channels for Chinese investors became especially evident as the price of gold fell in April. Working class investors, most of whom are middle-aged housewives, rushed to buy gold as though it were cheap cabbage.

During the week of April 15 to 21, sales at Caishikou Department Store, Beijing's largest gold jewellery retailer, reached at least 100 million yuan a day, and its sales of gold investment products more than doubled compared with the same week a year before.

Zhang Wen, a 36-year-old financial advisor in Beijing, said she was lucky to have bought gold bars when the price of bullion dipped to 267 yuan per gram, the preferred unit of measurement for Chinese gold merchants.

For every 10 people who inquired about gold as an investment before the price declined, three or four actually made a purchase. The number rose to six or seven once the price began to slide, said Xie Qingpeng, an analyst of gold market and investment at Guotai Junan Securities Co Ltd.

He attributed the growth of gold investors to the gloomy stock market and the scarcity of other investment channels.

"The financial products provided by banks do not offer high yields. Many of them are actually nonperforming assets that have been stripped off from banks and sold to investors. People rarely find sound investment options that can make a good profit. In this case, Chinese investors became very enthusiastic about gold. Compared with paper currency, gold is a tangible asset that will retain its value," he said.

However, he warned investors to be prepared to hold their gold for the long term because the price is likely to decline slowly, amid a widespread weakness in precious metals, and it will take time to rebound.

The decline in the price of gold came about mainly because of market speculation that the US Federal Reserve is considering major changes to its quantitative easing programme, So far, there has been no clear sign that the price will rise to precollapse levels, which means it's not safe for individual investors to enter the market at this time, according to Zhou Wenhuan, a futures analyst at Beijing CIFCO Futures Co Ltd.

With a decline in gold and a depressed stock market, investors with a low appetite for risk are turning to more secure and stable forms of investment.

A typical family can save 20 per cent of its disposable income in the bank, invest 50 per cent in financial products and bonds, and allocate the rest to other investment options, said Guo Tianyong, director of the research centre of the Chinese banking industry at the Central University of Finance and Economics.

Lack of options

Earlier this month, Zhang Yun, a 62-year-old retired government worker in Chengdu, Sichuan province, and her husband bought a five-year government bond yielding 5.5 per cent per annum. The benchmark interest rate for a five-year fixed deposit is 4.75 per cent.

The bank was scheduled to open at 8:30 am. When the couple arrived half an hour before opening time, a huge crowd had already gathered at the door. The minute the bank opened, the assembled throng rushed inside to grab a ticket and waited for their numbers to be called.

"I hadn't seen a scene like that for a long time. People were fighting each other to buy government bonds like crazy," she said.

According to Cheng Yuan, director of a housing fund project for Tsinghua Real Estate CEO Chamber of Commerce: "The real problem is that China does not offer a wide choice of long-term investment vehicles. Apart from works of art and gemstones, the only choice is real estate. That's why property prices keep rising, even though they are already too high."

Following a central government decision to rein in soaring property prices, city governments across China outlined detailed regulations in March to tighten control of the real estate market. Those measures included a 20 per cent capital gains tax on property sales in cities where the price of residential property is believed to be rising too quickly.

The regulations are extremely stringent in some cities, such as Beijing, but relatively lax in places such as Guangzhou in Guangdong province and Hangzhou in Zhejiang province.

However, contrary to central government expectations, property prices have continued to climb, even after the cities unveiled the new regulations. The average price of new apartments in 100 Chinese cities hit 10,098 yuan per square meter in April, a rise of 1 per cent from the previous month, according to a report from the China Index Academy.

"Considering that China will roll out a new urbanisation plan, the real estate market is not as pessimistic as it appeared when the central government announced the new regulations. The prices of glass, steel and coking coal, sectors closely related to the housing and construction markets, are likely to rise after falling sharply in the wake of the regulations," said Zhou of Beijing CIFCO Futures.

She suggested that investors should pay close attention to futures and stocks related to construction materials.

In addition to a dearth of long-term investment options, a lack of financial expertise is a major obstacle for non-professional investors, said Cheng of Tsinghua Real Estate CEO Chamber of Commerce.

"Some derivatives are too complicated to explain to investors and have to be traded by the professionals, but real estate is easy to understand. The price is mainly decided by location and the property is right there for the homebuyers to see and ready for the owner to live in," he said.

He noted that government regulations on the interbank and securities market have prevented many profitable and well-run companies from launching financial products that offer with a good return on investment on the Chinese mainland.

SOHO China Ltd, a leading commercial property developer listed in Hong Kong, announced in November that it had issued $600 million worth of five-year senior notes with a yield of 5.75 per cent in Singapore, plus $400 million 10-year senior notes yielding 7.125 per cent.

"If the company wanted to issue senior notes in China, it would have to go through a complicated procedure for government examination and approval, which would take a long time and cost a lot of money," Cheng said. "I believe that many financial products could be made available to the public if the government relaxed its control of the financial markets."

*US$1=6.1 yuan

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