China’s Coin Exchanges: making a fast buck on traditionally long-term investments
Investing in modern precious metal coins has always been touted as a sensible long-term option: a low risk way of expanding an investment portfolio which has both bullion and numismatic value – characteristics of such an investment that can combine to protect it in the future.
But having read an article by Peter Anthony, a new development – you might even call it a craze – in the Chinese coin market came to light. That is, the coin exchanges. The major cities of Beijing, Shanghai, Guangzhou, Jiangsu, and Nanjing all have them. These exchange funds are a platform that give investors the opportunity to speculate on prices of specific issues of collectibles by buying stocks and shares related to not only coins, but also stamps and cards, in much the same way that other stocks and shares are traded on other markets.
A Fast Buck
Although price fluctuations are limited to plus or minus 10% each day to ensure that trading doesn’t snowball and run away with itself, money and shares change hands at some speed. And in an industry where investors were traditionally in it for the long-haul, they are now in a trading environment where large amounts of money can be made – and lost – very quickly by buying shares in these coin funds, rather than the coins themselves. This appeals to many, but is by no means everyone’s cup of tea.
Creation of an Exchange Fund
So far my research has only gone as far as dipping into the Nanjing Exchange, but in Nanjing at least, it works like this. The exchange issues an official announcement declaring which collectible items (whether they be stamps, cards, or coins) have been selected to be included in new exchange funds. A limited time window – usually a couple of days – is then open for owners of these collectibles to submit them to the exchange. Items can be submitted by taking them to the exchange’s offices in Nanjing for appraisal and registration, or more recently through a certain online submission process. This ensures legitimate pieces are held in the funds, giving investors confidence in the stocks. Some funds even specify that, for example, only PCGS graded coins are acceptable. Members who submit coins to the fund are then issued with shares or bonds, which are then traded. Coins are locked into the fund after the window closes: no more can be added, and none can be removed.
Influence on the Traditional Coins Market
How does this affect the traditional coins market then? Having a trawl through the data tables, you can see that the exchange publishes the number of coins that were submitted to the fund alongside the total mintage that the People’s Bank of China originally issued of the specific coin. They then give this as a percentage of the total mintage, allowing you to see what fraction of the mintage is tied up in these funds.
Clearly if many coins were submitted to the fund, and this percentage is very high, then supply on the traditional coins market will be hugely restricted for the time period that the exchange fund is active. An example would be the 2013 Year of the Snake 1 oz silver fan-shaped coin, where 26.15% of the total mintage is currently held in an exchange fund. Some Chinese commentators have strongly attributed the recent price surges in certain silver bullion Panda coins to their inclusion – or mere speculation as to their inclusion – in one of these funds, despite a bear market for silver. That does not necessarily mean that funds holding a low proportion of the total mintage of a coin will not go up in value though! This is just one contributing factor.
Aside from this, the inclusion of a certain coin in a fund draws in a lot of market attention. It is likely that market price rises attributed to exchange fund inclusion for coins whose value is not so closely linked to their bullion value (the above-mentioned silver Pandas being a prime example where price surges have been somewhat unstable) will be more sustainable. This would be the case for proof or other coins where their numismatic value is of greater importance than their bullion value when determining price.
As well as serving as a new and exciting platform for investors who might not necessarily have the patience for a long-term investment, or have little interest in the collector value of the items themselves, these exchanges are popular among many currency collectors for more practical reasons. Using a legal loophole, they effectively allow for the sale of certain currency collectibles for their true collector value, which on their own – outside an exchange fund – would have had a price ceiling of their denomination due to certain laws of the PRC forbidding higher than face value sales for certain pieces. Banknotes printed since 2005 are a prime example. Since the law makes no stipulation concerning the sale of stocks linked to an exchange fund holding such items, stocks can then be traded in funds containing these hamstrung collectibles for their actual collector value, thereby dodging the legal technicalities.
These exchanges represent new and rapid developments in the Mainland Chinese coin markets, but their potential influence on international investors and collectors of Chinese coins should not be underestimated. In September, rumours circulated that the 2014 1 oz silver Panda was going to be picked for an exchange fund and floated on the stock market. Despite a falling silver market, prices for the 2014 Panda soared in just a couple of weeks. While the bubble for this Panda did eventually burst as prices returned to their more expected levels, it clearly demonstrates one way in which hype around this area of the market can hold sway over the more traditional coins trade.