After launching the Shanghai Gold Exchange (SGE) last year to open the Chinese gold market to foreign capital, China has now announced plans to launch a yuan-denominated gold fix by the end of 2015.
This is a strategic move that will give the world’s biggest bullion producer and consumer more influence over pricing. Many gold investors believe this could weaken the ability of the Western banks to manipulate and control gold prices. If the prices have been suppressed, diversification of price discovery from the West to the East could indeed lift the cap and allow for an upward revaluation to true free market prices.
The SGE is already the world’s biggest physical bullion exchange, so this move could have a huge impact on physical gold pricing. The leverage offered from COMEX paper gold will still dwarf the physical market, but as distrust in paper assets continues to grow, investors will increasingly look towards physical markets for true pricing.
There has been increasing withdrawals of physical gold from the exchange. Koos Jansen explains how this can be equated to Chinese demand for physical gold here. Once they make an official announcement of just how much gold they have accumulated in recent years, I think the price is going to shoot dramatically higher.
“We will be introducing a renminbi-denominated fix at the right moment, we are hoping to introduce by the end of the year,” Shen Gang, SGE’s vice president, said at the LBMA Bullion Market Forum in Shanghai on Thursday.
Pan Gongsheng, a deputy governor of the People’s Bank of China (PBOC), said the bank would continue to support “speedy and healthy growth of the China gold market” and its internationalisation.
Given its leading role in gold, China feels it is entitled to be a price-setter for bullion and is asserting itself at a time when the global benchmark, the century-old London fix, is under scrutiny for alleged price-manipulation.
If the yuan fix takes off, China could compel local buyers and foreign suppliers to pay the domestic yuan price, making the London fix less relevant in the world’s biggest bullion market.
However, given the yuan is not fully convertible, the two benchmarks could exist side-by-side globally.
China has been making efforts to liberalise the yuan and increase its influence in global gold markets. The Bank of China recently joined the London gold price benchmarking process, the first Chinese bank to do so, while the Industrial and Commercial Bank of China Ltd said it too was keen to join the process.
These banks could also join China’s yuan gold fix.
The SGE has submitted details of the fixing process, and rules and regulations for participants, to the PBOC a few weeks ago, sources familiar with the matter said.
“They may approve it anytime now,” said one source, who declined to be named because of rules on talking to media.
FOREIGN BANKS EYED
After receiving PBOC approval, SGE will work to sign up Chinese and foreign banks. Around 15 Chinese banks are expected to participate initially, the source said.
But the yuan fix’s success will depend on the participation of foreign banks, which may be reluctant to join given the global scrutiny of benchmarks following the manipulation of the London interbank offered rate.
“It will be hard to join the fix because there are lots of internal compliance issues. It might take months before we get everything done in house,” said a trader from a global bullion bank.
In a trial run for the fix in April, some foreign banks participated along with many major Chinese banks.
Details of the 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.
The yuan fix is the most recent effort by SGE to boost China’s position in the global gold market.
The exchange opened an international bourse in September 2014, allowing foreigners to trade yuan-denominated contracts for the first time. Australia and New Zealand Banking Group, Standard Chartered and HSBC are among the members of the bourse.