China targets counterweight in gold trade with yuan fix
Singapore (July 5) A decade after China kicked off a series of gold market reforms, plans to establish a yuan price fix mark one of Beijing’s biggest step so far to capitalise on the country’s position as the world’s top producer and a leading consumer.
While no immediate threat to the gold pricing dominance of London and New York, the benchmark could ultimately give Asia more power over bullion trade, particularly if the yuan becomes fully convertible, industry sources say.
The yuan fix is due to launch by the end of 2015 via the Shanghai Gold Exchange (SGE), which last year allowed foreign players to trade gold using offshore yuan. Across the commodity markets as a whole, we’re seeing some very significant initiatives by the Chinese authorities,” said Nic Brown, head of commodities research at Natixis.
“For the gold market, it’s an attempt to provide a Chinese counterweight that offers liquidity, offers physical metals, offers futures trading for the markets in the Asian time zone,” he said.
Asia is the top buyer of gold, with China and India alone accounting for about half of global consumption, but London and New York are regarded as price benchmarks for spot and futures trading respectively. In the last year, other attempts have been made to create a regional benchmark, including by Singapore, but China is being the most aggressive.
“The SGE and China wants to become the premier marketplace for gold trading and set the reference price as their view is this is where most of the gold is held and produced,” said a long-time bullion trader in Asia.
At a gold conference in Shanghai last week, SGE’s vice president, Shen Gang, said efforts towards internationalisation of the China market and building the exchange into an influential one globally would continue.
Shen said there were plans to boost liquidity by inviting security firms, insurance companies and funds to trade on the exchange, and form potential tie ups with exchanges in Dubai, Hong Kong and the CME Group.
China’s attempt to create a yuan gold benchmark is seen as another step in its efforts to make its markets more global. Beijing has also been conducting currency reforms and in April sources said there were plans to extend a pilot scheme under which the yuan is traded with few restrictions to all its free trade zones, before taking the scheme nationwide this year.
“The launch of a benchmark in China... will be a fundamental building block for the Chinese market,” said Jeremy East, global head of metals trading at Standard Chartered, at last week’s conference, adding that the yuan fix needed to happen for China to start pricing gold internationally.
China has also shown interest in participating in the London gold fix. The Bank of China joined the gold price auction in London recently as a member, while Industrial and Commercial Bank of China Ltd (ICBC) has said it was interested in participating.
Traders say until the yuan is fully convertible China will have a tough time taking liquidity away from London, though a fix in Asian hours could still be convenient.
“The timing (of the fix) is very important. At that time a lot of Europe will be asleep so I don’t think it will affect the European business, maybe it will become a benchmark for the Far East business,” said a London-based gold market participant.
The London fix is set twice daily, at 10.30 a.m. and 3 p.m London time - both well after Asian markets close
Details of the yuan fix are yet to be revealed, but sources say it would be derived from a contract traded on the bourse for a few minutes, with the SGE acting as the central counterparty.
That could make the process transparent - addressing one of the big concerns about the London fix.
An official at a Chinese bank interested in joining the London fix said he expected the yuan fix to be used as a benchmark for the local market first, and then to go global “over time” as more currency reforms are put in place.a
He said his bank had no qualms about participating in both the fixes at the same time.