The People's Bank of China (PBOC) Shanghai Branch recently decided to soon permit Shanghai Laofengxiang Gift Ltd. Co., a 100-year-old gold jewelry shop, to exchange gold jewelry, according to an official source.

It is the first time for the Chinese government to permit free exchange of gold jewelry, an official with the bank said.

According to PBOC officials, China are expected to have a free gold market within two years.

Gold traders said the state has always controlled gold jewelry dealings, and the purchase and distribution of gold has been managed solely by PBOC.

After Laofengxiang handed the new right, Chinese residents who wish to sell gold jewelry for cash can now directly go to the gift shop instead of PBOC.

Some experts noted that with the development of world's foreign currency exchange system and China's pending entry into the World Trade Organization, China needs to fully open up gold market, besides its capital markets, foreign exchange market and silver market.

The English-language Shanghai Daily quoted an anonymous expert as saying that PBOC would speed up its move to open the gold market and loosen control on the gold trading businesses starting October this year.

Experts said establishing a physical gold market is the first step of having a free gold market.

FOREIGN CURRENCY EXCHANGE SYSTEM IN THE WORLD

Gold and silver have been used as currencies for thousands of years, and gold also serves as a way of reserve for a nation.

After World War II, the Bretton Woods Conference established a fixed foreign currency exchange system with one ounce of gold equal to US$35.

From then on, every country pegged their currency to US dollar and used it as the basis for their exchange rate.

In 1974, as an economic crisis and inflation occurred in the United States and other major capitalist countries, economist Milton Friedman felt that one major reason for these capitalist countries to be hit by the economic crisis and inflation lied in their fixed exchange rates. The US government announced to get off the gold standard and freely float the exchange rates.

In 1998, gold price on the world market plunged to its twenty-year low of US$258.0 per ounce, US$542 lower than that in 1980s, after England and Australia dumped their gold.

CHINA'S DEVELOPMENT IN GOLD MARKET

In early 1950s, China produced only four tons of gold annually. By 1999, the country's gold production hit 172.9 tons.

In 1982, China opened up the gold jewelry market. And, the country witnessed steady growth of gold demand, as the government deepened economic reforms and residents upgraded their living standard.

In 1989, China's gold consumption stood at 40.3 tons. In 1999, however, it reached 205 tons.

The country's gold reserve in its total foreign exchange reserve dropped 2.1 per cent from the 1980s.

In addition, China launched gold price adjustment six times in 1999 alone so as to offset effects from gold price and foreign exchange on the international markets.

The State Economic and Trade Commission and PBOC have already opened up the silver market in the first half of this year, which served as the foundation for the gold market opening-up.