China Wants Gold Price Fixed to Shanghai Yuan Rate, Dethroning London

"Given the recent scrutiny surrounding the London gold fix, a Chinese yuan gold fix based on a transparent market would

China is about to take another step in solidifying its position as the most important commodities market in the world, and at the same time increasing the global exposure of its currency (known as yuan or renminbi). It has been revealed that Chinese authorities plan to launch a yuan-denominated gold fix by the end of the year based on the Shanghai Gold Exchange (SGE).

With the world’s first or second biggest economy, depending on how you measure, China is already both the biggest bullion producer and consumer in the world. Additionally, the SGE is the world’s biggest physical bullion exchange.Co nsidering this, it is no surprise the Chinese feel that they are entitled to have more control of the gold fix process.

“We will be introducing a renminbi-denominated fix at the right moment, we are hoping to introduce by the end of the year,” Shen Gang, SGE’s vice president, said at the London Bullion Market Association Forum in Shanghai.

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The exchange is expected to start the move as soon as it receives the People’s Bank of China’s (PBOC), the central bank, approval for the fix. The SGE has submitted details of the fixing process, and rules and regulations for participants, to the PBOC a few weeks ago, according to Reuters.

Pan Gongsheng, a deputy governor of the PBOC, said the bank would continue to support “speedy and healthy growth of the China gold market and its internationalization.”

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This is also an especially good time for China to makes this move as the process of setting the London fix, which served as a global benchmark for a century, has been accused of manipulation and a lack of transparency. With a successful yuan fix in place, China would make the London fix less influential. When the Chinese currency becomes free floating one day it might completely dethrone the old benchmark.

Expert Opinion

Thad Beversdorf, Chief Economist of Bullion Capital, a global physical bullion exchange, explained to Finance Magnates about the needs for China to make a local gold fix a success. He said: “China is the top player in the global physical bullion markets and this is a step toward imposing that lead position onto gold pricing. While the devil is always in the details, transparency is going to be the key.

Smart money moves to credible markets and we would expect a transparent yuan-denominated gold fix to draw smart money

Given the recent scrutiny surrounding the London gold fix, a Chinese yuan gold fix based on a transparent market determination would be well received. And such a fix process is the early indication. Smart money moves to credible markets and we would expect a transparent Yuan denominated gold fix to draw smart money.”

Beversdorf added about the effects of the move: “The overall impact would be material to both physical and levered markets as gold pricing would be more closely tied to actual physical supply and demand dynamics and less about political currency wars as USD pricing would become less relevant.  We believe this is a positive move for the gold markets overall.  Anytime true market forces take precedence the resulting market efficiencies attract capital.

That said, the yuan does create its own issues to foreign investors and a successful yuan gold fix would require foreign participation. And so again, the devil will be in the details but the early indication is that a yuan gold fix could have major implications to not only gold but currency markets as well.”

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