were actually delivered. china ’ s gold production of the same year was 200 tons. a sound prospect for chinese gold market is unfolding. international gold market and colleagues present at this conference have paid a lot of attention to the past and present of chinese gold market, but the future of a reformed and open market is of even greater concern to all of us. so today, i would like to associate myself in the discussion of the future of the market where i see three transformations : first, transformation from a market majoring in commodity transactions to financial transactions ; second, transformation from spot transactions to futures transactions ; third, transformation from a domestic market to an international market. 1. to transform chinese gold market from one for commodity transactions to one for financial product transactions. gold as a commodity has the multi - characters of a currency, a financial product and an ordinary kind of good. globally speaking, gold is phasing out as a currency, but the thriving investments in gold demonstrates its financial characters and its indispensability as an investment instrument. in all the major international financial centers, gold market is an integral part of the financial markets consisting of the money market, securities market and foreign exchange market. as an ordinary commodity, gold has become a consumption product for the urban and rural residents after the reform and opening up. the gold market can meet the demand of the consumers, and the gold producing or consuming enterprises. but gold is yet to be cultivated as a financial instrument for investment and store of value. transaction of gold as a financial product is still restricted in china, and it has not been brought into full play the financing function of the gold market. how can we transform the gold market into a financial market from its present stage as a commodity market? the current situation presents individual investment in gold as a realistic answer to this question. our total domestic household savings amount to as high as 12 trillion rmb, readily conditioned for investment in gold or rather turning the asset of the ordinary people from currency into gold. from the macro - economic perspective, it creates an additional channel to convert savings into investment balancing the demand and supply. from the micro - economic perspective, allowing people to hold assets in gold can improve social welfare benefiting both the country and its people. also, the dual characters of being an ordinary commodity and a currency allow gold to well hedge against risks. so it is practical to develop individual gold trading business. 2. transform the gold market from spot transactions to gold derivatives transactions. there

the market that enhances the absorption of credit risk although it remains difficult to assess where the risk will end up in case of a general situation of stress. this last point is just a first element of a series of new problems that we face as a result of those structural changes experienced by the system. that particular one is specially related to the credit derivatives market. this new market has been the source of uneasiness due the possibility of operational risk and liquidity problems. even the positive aspect of risk diversification that is fostered by markets for asset based securities and collateralized debt obligations should not be misinterpreted as, for instance, the existence of ‘ first loss ’ tranches that stay as responsibilities of the originator banks cannot be ignored. those practices imply that banks keep the riskier part of the securitised portfolio and it should also be remembered that the transfer of risk allows the banks to take other risks that they feel they have some advantage in managing. it is then not clear if the end result means a reduction of risk for the banking system as a whole. another cause of concern is related with the increased ‘ endogenous risk ’ already mentioned and that is very difficult to measure and to monitor, as malcolm knight ( 2004 ) 6 has stressed. an additional point refers to the fact that improvements in the managing of risk have made possible the assumption of new risks sometimes difficult to evaluate. the appearance and expansion of a segment of nonregulated institutions, hedge funds in particular, that have been responsible for the significant increase of financial activity has been other source of some unease. a last point worth mentioning has been an increase of the usual pro - cyclicality of the financial system. this is a consequence of some of the structural changes already mentioned, but some regulatory changes may have also contributed to exacerbate that tendency. basel ii, in spite of some adjustments attempting to mitigate this effect, has been mentioned in this connection as the closer association of regulatory capital to risk assessment will tend ceateris paribus to reduce capital requirements in boom periods as ratings improve, the opposite being the case in periods of economic slowdown. another contributor to this pro - cyclicality may have been the introduction of the international accounting standards that generalises the use of fair value accounting. the generalized use of mark - to - market or mark - to - model of assets and liabilities increases the volatility of the accounts of financial institutions. the important point though is the