China's Silver Market

History

The association between silver and money in China has been entrenched in the country for thousands of years.  In fact, the Chinese word for “bank” literally means “silver movement”.

China produced its first silver coin in 1183AD and at one time conducted its monetary policy via a silver standard until a large outflow of silver from the country forced China off the standard in 1935. 

The period from 1949 to 1982 saw strict control of the silver market by the Chinese government to prevent outflows of gold and silver from the country and to promote deposits of the metals for the new Renminbi currency.   At the time, citizens were banned from private ownership of gold and silver -- particularly coinage, bullion and even some jewellery and ornaments. 

On January 1, 2000, the Chinese government implemented a silver import restriction which prohibited all unlicensed silver imports into China except those intended for manufacturing of finished goods for re-export. Under the regulation, companies were required to obtain a licence from the central bank before importing silver for sale in the Chinese market.  The restriction was put in place in order to alleviate the silver oversupply in China at that time. 

As rapid economic growth from 2003 to 2007 pushed silver demand and consumption towards overtaking domestic production, the restriction was lifted on November 19, 2007.   The cancellation of this policy meant that companies were again able to import silver and sell it in the domestic market without the need of a licence from the central bank. However, companies will still have to pay 17% VAT (value added tax) on the imports.

The Chinese government’s decision to privatize and deregulate the mining sector in the last few years has encouraged an influx of foreign direct investment into the sector.  Privatization has resulted in strong recognition of ownership and mining rights along with the ability to transfer the rights to other parties.  A streamlined permitting and approval process has allowed mining companies to advance projects much faster then almost any other jurisdiction in the world.

China today has an essentially free silver market.

Demand & Uses

Since deregulation of the silver market in 2007, China’s fast growing industrial economy has seen great increases for silver demand in jewellery – much of it due to surging exports to the United States.  China has now become the second largest source of U.S silver jewellery fabrication.  Although jewellery accounts for a large portion (25%) of Chinese silver demand, the majority of silver is consumed in electrical applications in electronics, brazing alloys and solders, batteries, chemicals and plating.

Rising income levels and a higher standard of living, coupled with urbanization will result in more and more Chinese purchases of cars, electronic devices and jewellery.  The annual demand and consumption for silver is estimated to grow from roughly 50 million ounces in 2000 to 85 million ounces in 2010. In comparison the United States’ annual demand and consumption for silver is estimated to be around 140 million ounces in 2010. The combination of growth in domestic consumption and manufacturing for export will continue to result in double digit growth in Chinese silver demand.

Chinese Silver Exports and Imports

Supply

Despite being the third largest silver producing nation, China’s silver supply comes from a considerable number of small mines as opposed to a few large ones.  None of the top 20 silver producing companies operate in China, and none of the world’s top 10 silver producing mines are in China.  This indicates the degree of fragmentation of the industry and the existing lack of high ranking deposits in production.  Approximately 162,000 ounces of silver was mined in 1949 and 15 million ounces in 1980. The annual output of silver reached 36 million ounces in 1995 and now stands at 82 million ounces as of 2007.

The geological setting for silver deposits within China is particularly favourable, with abundant thick volcano-sedimentary silver hosts in extensional basin belts across the region.  The large number of known silver deposits within the country remains poorly explored and exploited leaving the potential for significant new discoveries or expansion of current deposits.  However, the output of silver mining in China has seen incredible growth.  

Total world mine production according to the silver institute was 579.6 million ounces for 2007. 
Additional sources of supply include government sales,
silver scrap, and producer hedging accounted for 173.1 million ounces for 2007.

* Sources:  The Silver Institute, China Mining Association, GFMS