China is planning to put up a gold fix denominated by the local currency before 2015 ends through the Shanghai Gold Exchange (SGE). This is meant to give the largest producer of bullion as well as consumers greater power over pricing.
Gold fix refers to setting of gold prices (two times daily) by London’s Gold Market Fixing Limited. The rate serves as benchmark in pricing of numerous gold commodities and derivatives.
According to SGE vice president Shen Gang at the LBMA Bullion Market Forum held in Shanghai, they will introduce a Yuan-denominated at the appropriate time which could be by the end of 2015. China expects approval from the People’s Bank of China (PBOC) almost immediately.
Meanwhile, PBOC deputy governor Pan Gongsheng confirmed the central bank supports fast progress for China’s gold market along with its internationalization.
Sources say, China can be the price-setter for bullion and asserts itself at this time when the long-honored London fix has come under fire for supposed price manipulation.
In case this move turns out successful in the long-term, China can oblige local buyers and overseas suppliers to use the Yuan as payment. This will reduce the relevance of the London fix in the massive bullion market worldwide.
Yet, both benchmarks can co-exist given that the Chinese note is not totally convertible. The Bank of China joined the gold price benchmarking procedure recently. It is the first Chinese financial entity to do so. On the contrary, Industrial and Commercial Bank of China also revealed it was inclined to take part in this process.
The SGE already forwarded details of the fixing mechanism together with guidelines for participants to the central bank, according to reliable sources.
Once this is approved, SGE will sign up these banks. Some 15 Chinese banks are seen as joining at the outset.
However, the success of the Yuan Fix will depend on involvement of foreign banks which may be not be very eager in participating due to global scrutiny of benchmarks following exploitation of the London interbank offered rate or LIBOR.
This is the latest initiative made by SGE to support Chinese position in the international gold market.
The exchange launched an international stock exchange in September of last year which permitted foreigners to trade Yuan-controlled contracts for the very first time. HSBC, Australia and New Zealand Banking Group as well as Standard Chartered Bank joined this bourse.