Gold production restrictions may cause black market to rise: economists

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Economists warned that a plan to reduce the number of gold producers can lead to a supply shortage and the emergence of a black market, news website VnExpress reported Monday.

The warnings came after the central bank introduced a draft decree, which requires gold bar producers to have a capital of at least VND500 billion (US$23.8 million) and a minimum market share of 25 percent.

The new requirements mean Ho Chi Minh City-based SJC, the country's largest gold company, will be the only producer left standing because it holds more than 90 percent of the market.

Vu Thanh Tu Anh, research director at Fulbright Economics Teaching Program, told VnExpress that the draft decree goes against market principles.

When the supply for gold is reduced but the demand is still high, a black market similar to the one for US dollars will pop up, Anh said, noting that the authorities will have difficulties controlling such a market.

Under the draft decree, gold traders will be subject to stricter rules as well. They will be required to have a minimum capital of VND100 billion and a presence in at least three major cities.

Economist Nguyen Van Thuan of the Ho Chi Minh City Open University said there are more than 10,000 gold traders in the country, and it's unlikely many of them will comply with the standards and quit the lucrative business. There is a probability that they will continue to trade gold bars illegally, just like they are doing with the dollars, he warned.

"The emergence of a black market for gold will be inevitable," Thuan was cited as saying in the VnExpress report.

The bullion trading needs to be put under control, but the new requirements under the draft decree will only "distort the market," he said.

To ease the dominance of gold in the economy, the government has to strengthen the local currency by reining in inflation, Thuan said. He added that using administrative measures to intervene in the market will not solve the root of the problem.

Vietnam has eight gold bar producers. With most of them set to leave the business, it would be difficult to deal with the equipment and human resources problems, said Dinh Nho Bang, chairman of the Vietnam Gold Traders Association.

If the draft decree is put into practice, the central bank needs to give the companies enough time to make plans and switch to a new line of business, Bang said.

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