On July 17th, People’s Daily reported that the Price Supervision and Anti-Monopoly Bureau of the National Development and Reform Commission is investigating gold retailers including but not limited to Shanghai Lao Feng Xiang (600612. SH) and Yuyuan Tourist Mart Company (600655.SH) for manipulation of gold jewelry retail price in Shanghai under the auspices of the Shanghai Gold & Jewelry Trade Association (“SGJTA”).

SGJTA was established in December 1996 and currently has 226 members with an industry coverage of 85%. It occupies a market share of 90% and its members include Shanghai Lao Feng Xiang and Yuyuan Tourist Mart Company, among others.

Investigation

The investigation centers on the Stipulation of Self-Regulatory Pricing of Gold and Platinum Jewelry in Shanghai adopted by SGJTA. According to Article 5, 7 and 8 of the Stipulation, the price of gold and platinum jewelry sold by the member companies shall be within the 2% to 3% range of the middle price set by the association.

The investigation also showed that unlike other regions in the country, the retail price of the gold retailers in Shanghai remained consistent with each other. The “Today’s Gold Rate” in different stores was shown to follow the abovementioned middle price set by the SGJTA.

According to Article 13 and 16 of China’s Antimonopoly Law, competing business operators are prohibited from reaching any monopoly agreements with each other fixing the price of commodities; no trade association may organize the business operators in its own industry to implement price-fixing agreements. Therefore, the Stipulation may be found by the NDRC as monopoly agreements fixing the price of jewelry.

Results

The investigation and evidence collection appears to have come to an end. A number of the investigated gold retailers turned in reports of confession, admitting they “colluded in manipulating price at the expense of consumers’ interest”, and are amending their business practices. Up until now, neither the NDRC or the Shanghai Municipal Development and Reform Commission has released the findings of their investigations.

Comment

Since the People’s Bank of China (“PBoC”) abolished its unified purchase and distribution of gold in April 2001, the PBoC launched the weekly quote on gold rate, adjusting the domestic gold rate on the basis of international gold rate fluctuations.

Currently, two exchanges in China are authorized by the State Council to engage in trade of gold products. One is the Shanghai Futures Exchange of Precious Metals and the other is the Shanghai Gold Exchange offering T+D deferred settlement service (T+D is a form of deferred settlement service which is based on the spot trade). The wholesale gold prices of the two exchanges align with those quoted in the international market. The “Today’s Gold Rate” seen in the Chinese gold retailers is the retail price adjusted on the basis of wholesale gold price.

The Stipulation is a form of horizontal monopolistic agreements fixing the retail price of gold entered between the gold retailers under the sponsorship of SGJTA. If the said stipulation is found illegal by the NDRC on the basis of Article 46 of Anti-Monopoly Law, the companies under investigation could be confiscated the illegal gains and be penalized in the amount of 1 to 10 percent of the sales in the previous year.