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China taking the long view in path to gold pricing relevance

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China taking the long view in path to gold pricing relevance

China, which has considered gold as a strategic asset fordecades, is accelerating efforts to build up its relevance in the global goldmarket.

In a recent move, the Chinese central bank said it wouldsimplify procedures for gold imports and exports in six cities, allowing goldcompanies to clear customs up to 12 times with one permit from June 1,according to a joint statement released by the People's Bank of China andGeneral Administration of Customs on May 4.

Currently, companies need to apply permits for every importor export of gold in China.

Zhang Wei, a gold analyst with consultancy SCIInternational, said in an interview with SNL Metals & Mining that theeasing is part of China's "global gold strategy" aimed at assertingmore control over gold pricing.

"The Shanghai Gold Exchange a Chinese yuan-based gold fixtwo weeks ago and it makes no sense if the fix only applies to the domesticmarket," said Zhang. "It needs to interact with the overseas markets."

"To do so, China needs to stimulate gold trading, bothincoming and outgoing," he added.

China's gold imports jumped 197.98% year over year to1,506.5 tonnes in 2014, marking it the largest gold importer in the world,according to data from China Gold Association, while exports remained thin andlimited to jewelry, Zhang said.

Seamus Donoghue, CEO of Singapore-based Allocated BullionSolutions, agreed that the impact of the introduction of China's first yuan-denominatedgold benchmark may be limited — at least in the short term — due to thecountry's closed domestic market and currency concerns.

"China's gold market is a one-way market where goldgoes in but does not really come out," Donoghue said.

He added that Shanghai is unlikely to rival London as aprice-setting center in the global gold market. "The real difference isthat the London market is an international market traded in an internationalconvertible currency, the dollar. If you look at China, obviously yuan is notfully convertible," said Donoghue.

Being the world's the largest miner, consumer and importerof gold, however, China is expected to create greater price transparency forgold over the long term, according to Donoghue.

Donoghue added that the gold price is currently driven bytrading activity in the paper market, instead of the physical trade, due to themuch greater trading volumes that gold gets as a pure financial instrument.

At the Shanghai Gold Exchange, physical and derivative goldtrading in 2015 was 17,033 tonnes, up 84% from 9,243 tonnes recorded a yearago. Gold futures trading at the Shanghai Futures Exchange increased 7% yearover year to 25,421 tonnes in 2015.

Meanwhile, 128,844 tonnes of gold futures traded at NewYork's COMEX and about 185,222 tonnes of gold cleared through London-basedLondon Bullion Market Association in 2015, according to data from Bullion Starand the London bullion market's website.

In comparison, physical gold demand around the globe wasflat at 4,212 tonnes in 2015, among which China accounted for 1,050 tonnes,according to a report from World Gold Council.

Donoghue noted that the yuan gold fix, being a physicalbenchmark, is one step towards better transparency.

"Ultimately, this is an international market and youcan't legislate global benchmarks. The benchmark will ultimately be set wherethe demand and liquidity is," he said.

The opening of Shanghai Gold Exchange's international boardin September 2014 increased liquidity for China's domestic market andcontributed to the 84% year-on-year increase in trading volume on the exchange.

SCI's Zhang expected the new gold fix to help boost goldtrading in China as well, though there has been little trading activity on thecontract since debut. Trading volume on April 19 was 5.7 tonnes, according to asame day report from Tencent Finance.

Zhang cited unnamed sources from the Shanghai Gold Exchangethat the bourse will introduce more members for the gold fix to improve trading.

Currently, the 18 trading members in the price-settingprocess includes China NationalGold Group Corp., Shandong Gold Mining Co. Ltd., 13 banks, two jewelry retailersand Swiss trading house MKS.

"These are all small steps in a longer story,"Donoghue said, adding that China is taking the right direction to build up theinfrastructures for its domestic gold market.

Zhang noted that control over gold pricing is not what Chinais coming after ultimately.

The bigger picture — along with the One Belt, One Roadinitiative, which covers major gold-producing regions in central Asia, and theestablishment of the Asian Infrastructure Investment Bank, which providessupport for infrastructure projects in Asia — is to further accelerate theinternationalization of the renminbi, Zhang said.

"More measures will be implemented to ease restrictionon gold trading in China and to improve China's position in the global goldmarket, in order to boost international acceptance of the yuan," he said.