The Future of China’s Gold Market:

Further Internationalisation, Greater Expectations

Albert Cheng, Managing Director, World Gold Council, Far East

In 2014, China’s gold market returned to its steady long-term trend after experiencing an exceptional rate of gold purchasing triggered by extremely low prices in 2013. Although the global gold trade is still consolidating, the 2014 milestone launch of the International Board of the Shanghai Gold Exchange was regarded as a significant move in the construction of the gold market. From the perspective of international investors, the robust demand for spot gold from China and India should be a reason for Asia to establish its own benchmark price during the Asian trading session. Asian market players are also in desperate need of a spot gold fixing system that is more open and more transparent.

The launch of the International Board of the Shanghai Gold Exchange (SGE) marks a transformation, not merely in becoming a part of the global gold trading market, but in creating a new world model where the SGE can be a leading physical trading centre in a newly integrated multipolar world. Shanghai will also become the focus of the gradually emerging “Physical Trading Axis of the East” spanning from Tokyo, Hong Kong and Singapore to Bangkok.

The Chinese gold market has grown exponentially in the last 10 years and China is now the largest market for both gold supply and demand. Moreover, according to our research, the percentage of gold transactions taking place in Asia increased from 57 percent in 2010 to 61 percent in 2014. In the past ten years, global gold demand increased by 50 percent, and gold demand in Southeast Asia increased by 250 percent. As the growth in the gold market shifts from West to East, the expansion of strong gold trading hubs in Asia will improve price discovery, liquidity, transparency and efficiency, all of which will transform the landscape of the global gold market. As a major market, accounting for 30 percent of global capacity, this will enable China to take its rightful place in the world gold market.  In addition, while a definite timetable has not yet been determined as to when RMB will have full convertibility in China, the newly launched International Board of the SGE offers global investors all RMB-denominated products at the International Board of the SGE, which will no doubt fuel China’s drive to internationalise the RMB, the first financial product opening for the global market. In return, RMB-denominated gold products will benefit the local market by providing gold price discovery and increasing the market efficiency.

2014 was the first year of the internationalisation of China’s gold market. 2015will be a significant year for the International Board of the SGE, as it is likely to reach a new stage this year. The SGE is accelerating its internationalisation process by cooperating with the World Gold Council and Comex in sharing channels, sales, marketing and transaction training to highlight just a few. In 2015, the SGE will recruit approximately 50 to 60 new members to improve client relations at the International Board.

In addition to the International Board of the SGE, China’s gold market is expected to experience other breakthroughs in terms of a two-way opening. The Chinese Gold and Silver Exchange Society recently indicated that the Shanghai-Hong Kong Gold Connect is due to launch in June of this year.  Both parties also agreed that they would leverage the opportunity presented by the International Board to further enhance cooperation on the future development and opening up of the China gold market. This could be a new and innovative operation that not only furthers the process of internationalising the RMB, but also facilitates the internationalisation of China’s gold market in terms of traders, capital flows and logistics.

Meanwhile, with the end of the annual sessions of the National People's Congress and the National Committee of the Chinese People's Political Consultative Conference, the SGE has announced its intention and commitment to develop “Shanghai Gold” in 2015, attempting to construct an Asia Gold price scheme that is equivalent to the newly launched LBMA Gold Price.

In looking at the Western market, we see many great opportunities resulting from the “One Belt and One Road” (OBAOR) strategy, introduced by President Xi Jinping during the NPC and CPPCC sessions. Mr. Xu Luode, President of the SGE, proposed at the two sessions that engagement with countries rich in gold reserves along the OBAOR route, such as Uzbekistan and Kazakhstan, should be leveraged in the areas of refinery development, client base expansion, new financing services and RMB-denominated gold trading. To accomplish these objectives, China’s gold market needs to enhance cooperation with enterprises and individuals along the OBAOR in the following ways: involving their participation in the SGE platform to hopefully become SGE clients, encouraging them to develop cross-border gold leasing services and advancing the use of physical gold and convertible currency in an RMB-denominated gold market. All efforts are aimed at strengthening the integration and influence of the RMB-denominated gold market. On March 14, Britain became the first G7 country to join the Asian Infrastructure Investment Bank (AIIB) in Beijing, a new Chinese-led investment bank which will provide a new financing channel for developing nations in the Asian-Pacific region. Following the decision, France, Germany and Italy also announced their participation in the AIIB on March 17, and Switzerland is also reportedly confirming its participation in the bank. All of these actions are indications of  a stronger financial bond between the West and the East, building a firm foundation for the RMB to become a world reserve currency. China is becoming an increasingly significant member of both the global gold market and the international financial market.

Therefore, the global gold industry will surely be positively impacted by the dynamic development of China’s gold market.

Disclaimer: Views are personal and not the views of the publisher.