Hong Kong Gold Exchange Could Help Shift More Economic Power East

by Peter Schiff, Schiff Gold:

London and New York dominate gold trading, but some analysts think Hong Kong may soon become a more significant player. Its success could solidify China’s place in the world gold market, strengthen the yuan, and shift more economic power from west to east.

Last May, Hong Kong Exchanges and Clearing (HKEx) announced plans to launch gold futures contracts.

This won’t be the first attempt to establish a gold exchange in Hong Kong. A government backed exchange launched in 2011, but the the Hong Kong Mercantile Exchange (HKMEx) folded after just two years.

According to the South China Morning Post, the HKEx is in a much better positioned to succeed where its predecessor failed.

HKEx will fare better. With quarterly revenues of HK$3 billion, it boasts enviable financial strength. As owner of the London Metal Exchange, it can command considerable expertise in commodity futures. And with the Hong Kong government as its largest shareholder since 2007, it enjoys powerful official backing.”

A successful yuan denominated gold exchange could be a boon for the Chinese government as it seeks to position the yuan as a major world currency.

The Chinese were on a roll in late 2015. In November of that year, China realized its goal of getting the yuan officially included as part of the International Monetary Fund’s benchmark currency basket, elevating it to reserve currency status. Meanwhile, the yuan was gaining in value. The currency appreciated 10% against the US dollar in four years, and the volume of yuan deposits held in Hong Kong topped 1 trillion in December 2014.

But Chinese authorities began to devalue the yuan in the late summer of 2015. Depositors and investors turned tail and ran. By June 2017, yuan deposits in Hong Kong had fallen by half. While Chinese yuan denominated bonds typically offer greater yield than US dollar bonds, it doesn’t offset the perceived exchange rate risk. Chinese stocks are also considered very risky. A 50% crash in the Shanghai stock market over the second half of 2015 hasn’t helped.

Enter the new Hong Kong gold exchange.

All this poses a problem for Beijing’s grand plan to promote yuan as an international reserve currency. Put simply, no one wants to hold the currency because there are no safe assets denominated in yuan for them to buy as reliable and secure stores of value. Deposits are liable to depreciate. So are bonds. And China’s stock markets are altogether too volatile and dangerous. As a result, over the last two years the internationalization of yuan has gone into reverse. That is why HKEx’s proposed yuan-denominated gold contract may prove interesting: it will allow offshore holders of the Chinese currency to park their money in gold, either though exposure to synthetic derivative contracts, or, if they choose, by taking physical delivery of the metal.”

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