Montreal, Canada

The Great Leap Forward, which started in 1958, was China’s long-term drive to modernize her economy. Though she didn’t do much under Mao’s authority, that certainly changed direction starting in 1978 under Deng Xiao Ping, the father of China’s version of modern laissez-faire capitalism.

China’s owes its incredible economic success to Deng’s experiment with SEZs, or Special Economic Zones, introduced in 1978 in Southern China.

Turn the clock forward 32 years and China is now not only the world’s largest gold-mining industry but also one of the few governments still actively encouraging the domestic consumption and ownership of physical gold. China has a rich history of gold ownership, whereby its citizens have relied on gold as a store of value for several centuries.

Earlier this month, China revealed the nature of her insatiable appetite for gold: imports surged more than five times compared to 12 months earlier to 209 metric tons. Estimates point to 2010 Chinese gold consumption hitting around 600 tons compared to 610 tons in India.

In some ways you could argue that China’s modern version of the Great Leap Forward is really the Great Leap in Gold Consumption. If current trends persist, China will overtake India as the single largest source of fabrication demand in 2011.

Another interesting development is China’s increasing openness of its domestic gold market and how it continues to liberalize gold trading and physical gold ownership. I find this remarkable considering it’s still largely a closed society brainwashed by socialistic rhetoric. Of course, market economics have clashed with this great nation before and it seems plausible that communism and capitalism will clash again in the future as society demands more freedom and political expression. But that’s another story.

Launched way back in 1910, the Chinese Gold and Silver Exchange is the only market in China that trades spot gold. Yesterday, the government announced it will launch the first international gold contract valued in Chinese renminbi next year. The government is encouraging Hong Kong to become a major conduit for not only Greater China gold trading, but also a long-term rival to London, Zurich and New York – major bullion dealing centers.

As China’s currency becomes fully convertible – as it must to be truly coined a great economic superpower – it will also eventually hold more gold bullion than any other nation. The United States, at some point, will have to relinquish a good chunk of her gold stash to pay for decades of profligate spending. Somehow I doubt the Chinese will forever accept dollar bills as America’s long-term credit continues its sad decline. The great gold transfer is underway and China will win this race.