A shopper checks gold jewelry at a store in Hong Kong. Gold transactions amounted to 117 million yuan on Monday trading with a settlement price of 346.95 yuan per gram. Laurent Fievet / AFP

Move gives another boost to city's status as offshore RMB hub

The Chinese Gold & Silver Exchange Society, a century-old bullion bourse in Hong Kong established, started trading gold quoted in yuan on Monday, giving another boost to the city's status as an offshore hub for the mainland currency.

The contract may generate as much as HK$6 billion ($770 million) in trades a day, exchange President Haywood Cheung said in an interview on October 14. Daily bullion trading volume at the society, which has 171 active members, has jumped to HK$136 billion from last year's HK$31 billion as appetite increases for gold due to it being seen as a "haven" from stock declines on global markets this year.

Gold transactions amounted to approximately 117 million yuan for the first day of trading with a settlement price of 346.95 yuan per gram. Some 322 kilograms were traded.

"There's triple demand for this yuan product," said Haywood Cheung, the president of the exchange. "Investors can enjoy the bull market in gold, the yuan's appreciation and hedge gold denominated in other currencies against the yuan."

"As yuan deposits in Hong Kong soar to 610 billion yuan, the yuan gold trading product could bolster the circulation of local yuan funds when more investors find out they have another new investment channel," Cheung added.

Based on the current daily gold transaction of 10 million ounces in the city, the trading generated by the exchange will be around 5 to 10 percent of the total gold trading volume in the city. It is expected that the proportion will rise to 30 percent in six months, Cheung added.

While Bank of China (Hong Kong) and Wing Hang Bank will be the clearing banks for the product, Wong Sha Company and Chancellor Precious Metals will provide liquidity for the product. The exchange has imposed a daily ceiling of 300 kilos for physical delivery of gold denominated in yuan to avoid depleting the yuan currency pool in Hong Kong.

The new platform is expected to attract mainland and global investors who want exposure to the simultaneous gold and yuan bull markets.

Cheung reckoned that local retail investors will play an important part in the market, estimating that local retail investors will occupy 40 to 60 percent of the total clientele.

However, gold and foreign exchange analysts are skeptical about the continuous bullish trend of both the yuan and gold bullion.

"Whether the investment is attractive depends on whether the appreciation prospect greatly outweighs the interest costs. Holding gold does not entail any interest returns and yuan deposit rates are higher than local dollar deposits," said Anderson Cheung, deputy managing director at Mitsui Bussan Precious Metals (Hong Kong).

"Gold prices should be stable at around $1,800 per ounce but may find it difficult at breaking through levels above $2,000 per ounce."

"Recent export volumes on the mainland are slowing down, therefore it may prompt the appreciation trend of the yuan currency to be restrained," said Hang Seng Investment Services Chief Analyst Mark Wan.

Bullion prices have jumped 17 percent this year, reaching a record $1,921.15 an ounce on September 6. Gold prices fell from their peak as investors sold the metal to cover losses in other markets. The precious metal will likely trade between $1,500 and $1,700 an ounce in the short term, the exchange's Cheung said.

Bloomberg contributed to this story.

oswald@chinadailyhk.com

China Daily

(HK Edition 10/18/2011 page2)