By Paolo Danese
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The Shanghai Gold Exchange fired the first shot, opening trading of three spot contracts to international market participants in September 2014. The exchange then went live with a gold price benchmark in April 2016, with two foreign banks participating in the auction at launch.
That China is a dominant force in the global gold markets is beyond doubt: it now holds the top spot for mining, consumption and imports of the precious metal. But China’s heft is only starting to be felt outside its borders. Chinese banks have begun participating in the London market more actively, with the likes of Bank of China and Bank of Communications now contributing to the London Bullion Market Association (LBMA) price benchmark.
Industrial and Commercial Bank of China (ICBC), winner of this year’s gold survey, has taken similar steps, joining the LBMA as a market maker and becoming a gold benchmark participant for the Intercontinental Exchange.
The bank also acquired a 2,000-tonne capacity gold vault previously affiliated with Barclays, putting it on the map as a global gold market service provider for trading, settlement and warehousing, according to Zhou Ming, general manager of the precious metals department at ICBC. The bank is the leader in the onshore market for paper, physical and structured gold products.
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Roland Wang, WGC |
Barriers remain, however, to China’s attempt at better integrating the local market with the global bullion markets. Roland Wang, managing director for China at the World Gold Council (WGC), takes an optimistic view.
“The Chinese market is getting more and more important,” he says. “The trend in the global gold market is that gold moves from the west to the east, at least in terms of the physical demand. Over 50% of demand comes from the east, especially India and China.”
That, however, has not translated into local markets, nor currencies gaining more influence over market trends set in London and Chicago. Part of the blame is with China itself, which has been slow in opening up its very large physical market to the world. Banks are still subject to high fees at the local exchanges and restrictive import quotas, a mechanism that has scared off many global players.
In 2016, this control reflected depreciation pressures on the renminbi – paying for gold imports in dollars would put further downward pressure on the currency. That has impeded international contracts launched in Shanghai, which have seen combined turnover of Rmb130 billion ($19.2 billion) since the start of 2016, or an average 0.7% of total turnover on the Shanghai Gold Exchange.
Foreign banks with long-standing onshore franchises, such as HSBC and Standard Chartered, are active, while others have struggled to gain a foothold. Russian banks are an exception: VTB joined in 2016 and Sberbank began to trade on the Shanghai international board on July 13 this year.
Price premiums
The effect of tight controls on imports is most clearly seen in the price premiums in the onshore market, a price difference that serves as an indicator of the gap between supply and demand in the local market.
“The limits on gold imports and exports in the China market mean that the direct impact of China demand on prices is affected, making its influence on global markets quite indirect,” says Wang. “But in the long run, we see further internationalization of the renminbi and the market opening up.”
As for the outlook for the China gold market, Wang is positive. “I believe the situation will continue to improve,” he says. “We have seen a recovery on gold for jewellery and investment markets in the first quarter; we hope that will continue in the second half.” ICBC agrees, noting that the macroeconomic and currency environment in 2017 has made the market more appealing to local and foreign investors.
“The stabilization of the renminbi will help draw many more fund inflows to the domestic market, which makes gold a hedging and value-added asset for investors alongside traditional bonds and equities,” says Ming. As for China’s broader role in the global gold markets, it is worth keeping an eye on two new initiatives. The gold exchange in Dubai launched a renminbi-denominated contract based on the Shanghai price benchmark earlier this year, while the Hong Kong Exchange started trading a new gold futures contract in renminbi and dollars on July 10.
“That all shows there will be more indicators and a greater role for renminbi in gold pricing,” says Wang. “It also provides an option for gold investors internationally to arbitrage between renminbi and dollar prices.”
