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On April 19， a yuan-denominated gold benchmark price trading began operations in the Shanghai Gold Exchange， with the price set twice a day. The launch of the benchmark price， dubbed Shanghai Gold， will drive the development of gold derivatives and China’s pricing power in the international gold market.
Gold is an important component of global finance. Therefore， many countries desire the power to set prices， or at least have some influence in the process. Currently， over 80 percent of gold-pricing power is contained within London and New York， which hold the aces in setting rules and transaction practices.
London Gold， for example， was set up in 1919 and has remained the pricing center for global spot trading. The London Gold Fixing is not only used extensively for settling transactions between producers， consumers and financial institutions， but also as the pricing benchmark for many gold derivative transactions and for gold bar trading among miners， central banks， jewelers and financial institutions. This mechanism has been dominated by European and U.S. banks.
Despite being the world’s largest gold producer and consumer， China has barely played a role in global gold pricing； its market is in the shadows of London and New York. Though it contributes over 50 percent of the world’s bullion market， it has little influence in the pricing mechanism. The unveiling of Shanghai Gold will give Chinese banks a foothold in pricing. This should also strengthen the link between domestic and foreign markets， encourage the global market to more accurately reflect China’s supply and demand， facilitate the internationalization of its gold market and endow it with a louder voice in pricing. Eighteen banks participate in Shanghai Gold pricing， including the five major state-owned commercial banks and multinational banking groups such as Standard Chartered.
The Shanghai gold benchmark price is quoted as the price for trading of 1 kg of 99.99-percent purity bullion and derived from multiple rounds of trading. Pan Gongsheng， Vice Governor of the People’s Bank of China， noted that it’s not only an important attempt to further liberalize China’s financial factor market and embrace global integration， but also a response to the profound reshuffling of the global gold market， shifting pricing power from the West to the East. This benchmark price would serve as a tradable， fair and equitable tool for global players to manage risks and conduct innovation， improving the yuan-denominated pricing mechanism and speeding up the internationalization of China’s gold market.
The Shanghai Gold Exchange launched its international board as early as September 2014， in a move touted as a bid to muscle in on gold-pricing power. This isn’t necessarily the case， since transaction behavior， demand and pricing power can be independent entities in contemporary markets. China is the largest consumer globally for many bulk commodities and is attempting to establish its own trading market. However， it’s still far from achieving real pricing power.
Objectively speaking， the creation of the international board was originally meant as a means to obtain gold-pricing power， paving the way for the launch of the ShanghaiHong Kong Gold Connect. The Chinese mainland’s gold imports from Hong Kong account for one third of global consumption. This connect should further diversify the mix of Shanghai Gold investors and attract both onshore and offshore capital， undoubtedly enhancing the price discovery capabilities of the Chinese gold market.
Shanghai Gold will not only grant greater weight to China’s gold-pricing ability， but also help mold the yuan into a global cur- rency. China is making efforts to push the yuan’s internationalization in order to become more influential in the new global financial order. Since the reforms of the yuan exchange rate mechanism in 2005， the currency has expanded globally， with more countries accepting and using it. Its inclusion in the Special Drawing Rights basket by the International Monetary Fund is a significant moment in this journey. If it comes to fruition， China’s influence in the global financial system will expand remarkably.
However， as the yuan has not yet realized full convertibility， the Shanghai Gold and London Gold benchmarks will coexist. Although Shanghai should gradually shake off restrictions from London， it remains an uphill struggle to influence the global pricing system. To this end， Shanghai Gold should attract the largest global market players to participate in its trading and spread its pricing influence into gold industrial chains， such as gold derivatives and transactions of spot gold. From this perspective， it’s vital for China to speed up full convertibility of the yuan and liberalize the free entry and exit of capital.
Gold is an important component of global finance. Therefore， many countries desire the power to set prices， or at least have some influence in the process. Currently， over 80 percent of gold-pricing power is contained within London and New York， which hold the aces in setting rules and transaction practices.
London Gold， for example， was set up in 1919 and has remained the pricing center for global spot trading. The London Gold Fixing is not only used extensively for settling transactions between producers， consumers and financial institutions， but also as the pricing benchmark for many gold derivative transactions and for gold bar trading among miners， central banks， jewelers and financial institutions. This mechanism has been dominated by European and U.S. banks.
Despite being the world’s largest gold producer and consumer， China has barely played a role in global gold pricing； its market is in the shadows of London and New York. Though it contributes over 50 percent of the world’s bullion market， it has little influence in the pricing mechanism. The unveiling of Shanghai Gold will give Chinese banks a foothold in pricing. This should also strengthen the link between domestic and foreign markets， encourage the global market to more accurately reflect China’s supply and demand， facilitate the internationalization of its gold market and endow it with a louder voice in pricing. Eighteen banks participate in Shanghai Gold pricing， including the five major state-owned commercial banks and multinational banking groups such as Standard Chartered.
The Shanghai gold benchmark price is quoted as the price for trading of 1 kg of 99.99-percent purity bullion and derived from multiple rounds of trading. Pan Gongsheng， Vice Governor of the People’s Bank of China， noted that it’s not only an important attempt to further liberalize China’s financial factor market and embrace global integration， but also a response to the profound reshuffling of the global gold market， shifting pricing power from the West to the East. This benchmark price would serve as a tradable， fair and equitable tool for global players to manage risks and conduct innovation， improving the yuan-denominated pricing mechanism and speeding up the internationalization of China’s gold market.
The Shanghai Gold Exchange launched its international board as early as September 2014， in a move touted as a bid to muscle in on gold-pricing power. This isn’t necessarily the case， since transaction behavior， demand and pricing power can be independent entities in contemporary markets. China is the largest consumer globally for many bulk commodities and is attempting to establish its own trading market. However， it’s still far from achieving real pricing power.
Objectively speaking， the creation of the international board was originally meant as a means to obtain gold-pricing power， paving the way for the launch of the ShanghaiHong Kong Gold Connect. The Chinese mainland’s gold imports from Hong Kong account for one third of global consumption. This connect should further diversify the mix of Shanghai Gold investors and attract both onshore and offshore capital， undoubtedly enhancing the price discovery capabilities of the Chinese gold market.
Shanghai Gold will not only grant greater weight to China’s gold-pricing ability， but also help mold the yuan into a global cur- rency. China is making efforts to push the yuan’s internationalization in order to become more influential in the new global financial order. Since the reforms of the yuan exchange rate mechanism in 2005， the currency has expanded globally， with more countries accepting and using it. Its inclusion in the Special Drawing Rights basket by the International Monetary Fund is a significant moment in this journey. If it comes to fruition， China’s influence in the global financial system will expand remarkably.
However， as the yuan has not yet realized full convertibility， the Shanghai Gold and London Gold benchmarks will coexist. Although Shanghai should gradually shake off restrictions from London， it remains an uphill struggle to influence the global pricing system. To this end， Shanghai Gold should attract the largest global market players to participate in its trading and spread its pricing influence into gold industrial chains， such as gold derivatives and transactions of spot gold. From this perspective， it’s vital for China to speed up full convertibility of the yuan and liberalize the free entry and exit of capital.