Hong Kong starts trading gold in renminbi

Hong Kong's Chinese Gold & Silver Exchange Society have officially started trading gold denominated renminbi today in an effort to attract the HK $600 billion of Chinese currency sitting on deposit in the city's banks. This could boost the trading volumes up during the next six months.

By Nick Ferguson
17 October 2011
Finance Asia

Hong Kong’s Chinese Gold & Silver Exchange Society officially starts trading gold denominated in renminbi today, in a bid to attract the HK$600 billion of Chinese currency sitting on deposit in the city’s banks.

Haywood Cheung, president of the 101-year-old bullion exchange, said the so-called Renminbi Kilobar Gold contracts could boost trading volumes by up to 30%, or HK$40 billion a day, during the next six months. Growth has already been strong this year, with average daily electronic transactions reaching HK$136 billion after a full-year average of just HK$31 billion in 2010.

“By attracting both local and international investors, the Renminbi Kilobar Gold is a significant step towards internationalising the renminbi,” said Cheung. “It also consolidates Hong Kong’s position as an offshore renminbi centre by providing investors with a new alternative in leveraged trading of renminbi.”

Investors who choose to convert their renminbi bank deposits into the new gold contracts can gear up their exposure to the currency by as much as 25 times. During a visit to the exchange on Friday, Cheung told FinanceAsia that this ability to use leverage will prove attractive to investors, who until now have lacked opportunities to put their renminbi to work.

It also helps that gold and renminbi are both headline-grabbing investment trends. Cheung reckons they still offer value, arguing that gold is just half-way through a 10 to 15-year bull cycle and that renminbi will appreciate by 5% to 6% a year before it becomes freely convertible. That is an appealing proposition compared to moribund returns on bank deposits.

Some critics have argued that the exchange will face tough competition from the Chinese mainland. Shanghai already hosts onshore trading of gold contracts and, according to sceptics, continued liberalisation of the domestic market will make it easier for Chinese investors to bypass Hong Kong.

In response, Cheung noted that China is actively promoting Hong Kong as an offshore renminbi centre and the city enjoys a big advantage through its established role as a trusted international financial centre. Far from leaving the exchange, Chinese investors have increased their share of trading on the CGSE to 50% to 60%, up from around 30% at the start of the year.

It is also possible that the Hong Kong and Shanghai bullion exchanges could cooperate in the future as the two societies have adopted the same standards with regards to purity. “When they open up, I think we can be very good associates,” said Cheung.

In the medium term, the exchange is even planning to launch an initial public offering of its shares to make it easier to secure international deals. “We have the vision, for sure,” said Cheung. “An IPO will allow us to have more international partners. International institutions want to be able to have an exit from their investment when they come in, but right now I don’t have that because the exchange is private.”

Trading of the Renminbi Kilobar Gold contracts will start with 25 of the exchange’s member firms from various sectors, including banking and gold dealing, with Wing Hang Bank and Bank of China acting as settlement banks. The spot gold contracts are traded under the revamped electronic trading system established by the CGSE and quoted and settled in renminbi. Starting from today, members can take physical delivery of the gold upon settlement.

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