Yuan with the world
Haywood Cheung Takhay believes the rise of the mainland gold industry will act as a springboard for the internationalization of the country’s currency, the renminbi.
The renminbi took a big step toward becoming an international reserve currency last year. That was when it was accepted by the International Monetary Fund (IMF) as part of the special drawing right basket of currencies, effective from October this year, noted Cheung, honorary permanent president of Hong Kong’s Chinese Gold and Silver Exchange Society (CGSE) bullion platform.
The currency needs a platform to become “active”, that is, for foreign countries to use it to buy commodities, Cheung said, pointing out that gold is one of the most popular and internationalized commodities.
On the one hand, renminbi goes out when gold is imported from the US, UK and Switzerland; on the other, it is also internationalized when foreign institutions use the yuan to engage in arbitrage activities, he explained.
He added that renminbi-denominated gold products can open the door for the currency to reach more international users, and so increase transactions and circulation.
The CGSE in 2011 launched the world’s first offshore renminbi-denominated gold product — the Renminbi Kilobar Gold Contract.
This, the world’s first offshore renminbi-denominated spot gold contract, offers investors a chance to speculate on appreciation of the mainland currency while hedging in gold.
Institutional and retail investors may settle either through a spot contract or physical delivery.
Currently, the product has achieved an average daily trading volume of about HK$16 billion to HK$18 billion.
Last July, the CGSE launched the ShanghaiHong Kong Gold Connect, allowing the first batch of 30 members to trade gold on the international board of the Shanghai Gold Exchange with offshore renminbi.
Cheung forecast that renminbi-denominated gold pricing power will become a dominant force in Asian and international markets, and it will greatly enhance the standing of the renminbi in worldwide forex and financial markets.
But he pointed out that the renminbi needs to fluctuate along a wider trading band to better implement the internationalization process. “The cost of arbitrage is usually about 1 percent, so the renminbi needs 3 to 5 percent fluctuation,” Cheung suggested.
Moreover, larger fluctuations in the renminbi would also benefit the gold industry because of the yellow metal’s insurable value, he believes.
He also estimates that both the gold and renminbi markets will become more active in the second half of this year.
Haywood Cheung Tak-hay believes Shanghai and Hong Kong are like the positive and negative poles of the same magnet, which can attract more traders if the pair works together, while Shenzhen is in the middle of the magnet. Haywood Cheung Tak-hay, honorary permanent president, Chinese Gold and Silver Exchange Society