China to 'take rightful place' in gold market

The Shanghai Gold Exchange is to launch the yuan-denominated gold index this year, predicted to increase China's gold pricing power. [Photo provided to China Daily]

Growth in the global gold market is shifting from West to East and China should further liberalize its gold exchanges. This will allow international participation with the country finally "taking its place" in the world market, said Roland Wang, managing director for China at the World Gold Council.

Wang pointed out that the expansion of strong gold trading hubs in Asia will improve price discovery, liquidity, transparency and efficiency. This in turn will transform the landscape of the gold market which will benefit China.

One catalyst for China's increasing gold pricing power is the much-talked-about yuan-denominated gold index, expected to be launched by the Shanghai Gold Exchange by the end of this year.

This new gold index will provide competition to the London Gold Fix, which is currently the global reference point for the industry, meaning that gold buyers and sellers will look to the benchmark to determine the exact price of their specific trade.

The Shanghai Gold Exchange was established in 2002 to centralize China's gold trading. It now consists of a Main Board for Chinese traders and an International Board, which is dedicated to foreign investors.

Currently the Main Board and International Board are separate from each other because the yuan is not freely convertible and China's capital controls mean financial trades made by domestic and foreign traders have to be separate in order to help maintain currency control.

But once the yuan can be freely converted, the two boards are expected to merge and the SGE will become a gold exchange center globally, with Shanghai taking its place as one of the three major international gold exchanges, alongside New York and London, Wang said.

While China is a big consumer of gold globally, it still lacks pricing power.

Wang said Chinese banks need to increase their participation in international gold exchanges so that the demand and supply of gold in China can be reflected in prices in global markets.

"China's lack of international participation tends to directly affect China's competition for gold price-fixing power," Wang added.

"Only by involving Chinese financial institutions in the global gold fix mechanism, and by advancing (yuan-) denominated commodities to encourage foreign investors to conduct business in the China market, can China increase its gold price-fixing power accordingly."

One major milestone in China's participation on international gold exchanges is Bank of China becoming the first Chinese lender to join the London Gold Fix, among seven other banks.

Administrated by the ICE Benchmark Administration Ltd, the London Gold Fix is a twice daily electronic auction held in London which determines the benchmark gold price.

Wang said this move by the Bank of China will reinforce the connection between the Chinese and overseas markets, with the international gold price better reflecting supply and demand in China, as well as promoting the internationalization of the Chinese gold market.

"Bank of China's participation in the Gold Fix is the first step for China being the largest gold market in the world, and to become a gold trading center along with London and New York," Wang said.

In the long term China's increasing gold pricing power globally will fuel the yuan's internationalization. The International Board of the SGE looks certain to offer a range of yuan-denominated products in future for foreign investors to trade in, which in turn will increase liquidity for the yuan internationally.