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April 22, 2016

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China eyes more say in global gold pricing

WITH the launch of its own gold price benchmark, China, the world’s biggest producer and consumer of gold, has more influence in the pricing of the precious metal.

It will be some time, however, before “Shanghai Gold,” launched by the Shanghai Gold Exchange on Tuesday, can truly challenge the dominance of its international counterparts.

The fix, the Shanghai Gold Benchmark Price, was set at 260.39 yuan (US$40.20) per gram yesterday morning; by the afternoon the fix was 261.82 yuan.

As the first gold price benchmark denominated in the Chinese currency, the fix is the quote for trading of 1 kilogram of 99.99 percent purity bullion, derived from multiple rounds of trading.

Eighteen institutions, including the Bank of China and China Construction Bank, are listed by SGE as market makers for the fix.

The trading margin is set at 6 percent and transaction fees are exempted until June 30.

A landmark move

The launch of the new benchmark is of great significance to China and marks the start of a new global gold market, business insiders said.

Aram Shishimanian, CEO of the World Gold Council, lauded the move as a landmark for the exchange and the internationalization of China’s gold market.

China is one of the world’s biggest buyers of the gold, and the SGE has been the world’s largest physical gold exchange for nine years. But the gold price is set in New York and London.

In addition, as the gold price is denominated in US dollar, market insiders have long held the view that the old pricing system cannot reflect the real market demand for gold in different regions.

The Shanghai fix could lay the foundations for a new global gold market jointly built by London, New York and Shanghai, and the trend of the gold going from the West to the East would continue, Shishimanian added.

The introduction of the benchmark is a major effort of China to further open up and integrate its financial market into the global system, Pan Gongsheng, vice governor of the People’s Bank of China, said on Tuesday.

The setup of the new pricing mechanism for the gold is also in line with the latest trend of the gold market shifting from the West to East, Pan said.

SGE Chairman Jiao Jinpu said the launch of the benchmark allows bullion trading to develop in China’s financial markets and encourage more participation by global investors.

The Chinese currency would also be a winner, as the fix denominated in yuan would naturally help reduce gold’s price dependency on the US dollar and boost international use of the yuan, analysts said.

The road is long

The new benchmark would help China break away from the “shackles” of the “London Gold,” but there is a long way to go before “Shanghai Gold” can have a serious impact on global gold pricing, experts said.

Adrian Ash, head of research at BullionVault, told media that the Shanghai fix, for now, “will remain just another measure of localized demand and supply, rather than a tool for global traders,” citing the country’s ban on exports of gold bullion.

Only when “Shanghai Gold” attracts leading global market makers can it influence the global gold sector value chains, said a gold trader who asked to be kept anonymous.

“London Gold” has been long blamed for its lack of transparency in pricing, but it will remain the most influential benchmark in the global market, as its five market makers, including HSBC, enjoy a powerful status that no other can match, the trader said.

It would be extremely hard for SGE to enlist them as market makers, and this is why it is still too early to discuss whether “Shanghai Gold” can catch up with its New York and London counterparts, he added.

“Shanghai Gold” and “London Gold” are more complementary than competitive, Li Guohong, general manager of China’s Shandong Gold Group, said in an interview.

The two benchmarks reflect the supply and demand of different regions and markets, Li said.


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