China emerging as a major gold trade player
TOKYO -- As a major gold importer, China is aiming to increase its influence on global gold trading by joining the gold auction process on the London market and allowing foreign participation in China's gold market.
Moreover, the country's central bank recently started revealing the extent of its gold reserves. The move is widely seen as a transparency-boosting gesture to help Beijing's bid for its currency to be included into the International Monetary Fund's reserve currency basket, known as Special Drawing Rights.
Analysts say that all these moves are part of Beijing's efforts to play a leading role in the global gold trade and help to further internationalize yuan.
In June, major commercial lender Bank of China was approved to participate in the London Bullion Market Association's gold price auction process, becoming the first Asian bank to do so. Currently, the LBMA has 11 banks as direct participants in its gold price-fixing process, most of which are European and North American lenders.
"Bank of China's direct participation in the gold auction would ... make the international gold price better reflect the supply and demand in China, and help to promote the internationalization of the Chinese gold market," Yu Sun, general manager at Bank of China's London branch & CEO of Bank of China (UK) was quoted as saying by the LBMA.
This indicates that China's gold supply and demand will have a greater impact on international gold price-setting.
Gold trading has been strong in China. Turnover hit a new monthly record in August on the Shanghai Gold Exchange, where cash-for-gold transactions are conducted. Despite sluggish demand for gold jewelry, there has been a sharp increase in demand for gold as an investment. As such, the Shanghai market has emerged as a significant player in global gold markets.
In the gold price auction process, which is administered by ICE Benchmark Administration, participants receive buy and sell orders from their clients and join the daily price-setting auctions held twice a day. Tons of gold are traded in the auctions, and mining companies and central banks engage in gold transactions through these financial institutions.
Unlike volatile gold futures prices, the LBMA gold price is fixed every single day. This price serves as a reference price for common gold transactions, such as miners' price quotes and gold retail prices.
Meanwhile, market watchers believe that the Shanghai Gold Exchange will likely start yuan-denominated gold price setting by the end of this year. Under the current system, the IBA does not fix gold prices during the daytime hours for the Asian region, one of the biggest gold consumer markets in the world. As the Shanghai Gold Exchange has a large amount of gold, it would be relatively easy for the exchange to do the price setting in Asia.
In September last year, the Shanghai Gold Exchange launched a yuan-denominated international board in the China (Shanghai) Pilot Free Trade Zone, thereby opening the doors for foreign participation in China's tightly-controlled gold market. Given the current trading volume and other factors, however, a yuan-denominated gold price setting mechanism, even if implemented, would likely have a limited impact on global gold markets at the moment.
"But looking into the future, it may be meaningful to create such a system as part of China's financial infrastructure," said Itsuo Toshima, a gold market analyst.
Meanwhile, China's central bank broke its silence and began to disclose its gold holdings on July 17 for the first time in six years. The People's Bank of China released its gold reserves update on August 14, one day after it devalued yuan for three consecutive days. It appears that China is trying to increase its transparency quickly.
Every month, central banks of major advanced economies disclose to the IMF how much gold they hold in their foreign reserves. As gold is a safe-haven asset, these central banks add gold holdings to their foreign reserves. China is widely expected to follow in their footsteps and announce its gold holdings on a regular basis.
Koichiro Kamei, a financial and precious metals analyst, sees all these moves by China as an attempt to internationalize the yuan. Bank of China's participation in the LBMA gold price auction process will make it easier for China to buy more gold and add to its foreign reserves.
The IMF will make a decision by the year end whether it will accept yuan into its SDR along with the U.S. dollar, the Japanese yen and other major currencies. For China, that would be a step closer toward yuan's internationalization.
China's disclosure of its gold holdings may be intended to tip the balance of the IMF's discussion in its favor.