Hong Kong to Widen Yuan Center Appeal With Bullion Trade Offer

Chinese Gold & Silver Exchange President Haywood Cheung
Haywood Cheung, president of Chinese Gold & Silver Exchange Society. Photographer: Jerome Favre/Bloomberg

Hong Kong’s Chinese Gold & Silver Exchange Society, a century-old bullion bourse, plans to start trading gold quoted in yuan from May, bolstering the city’s plans to be China’s offshore currency center.

Bank of China Ltd. and Wing Hang Bank Ltd. will be the clearing banks, society President Haywood Cheung, 58, said in an interview. The gold product, which may generate as much as HK$6 billion ($770 million) in trades a day in a year, will be quoted and settled in the Chinese currency, Cheung said.

The plans will support Hong Kong’s development as China’s offshore currency center as yuan-denominated debt sales there doubled last year. Yuan deposits in the former British colony rose to a record 371 billion yuan ($56 billion) in January.

“People could speculate on the yuan through gold, which is globally recognized,” said Cheung, who has traded bullion for more than 30 years. “We want to attract foreign investors who want to invest in the Chinese currency.”

China is promoting the use of the yuan in global trade and investment to reduce its reliance on the dollar. Li Ka-shing, Hong Kong’s richest man, is planning to price an initial public offering of a real estate investment trust in China’s currency.

The yuan will advance 4 percent to 6.31 per dollar by the end of the year, according to the median estimate in Bloomberg survey of 22 analysts.

“As China’s bullion market is still in a developing stage, Hong Kong has a potentially huge market to capture,” said Tommy Ong, senior vice president of treasury and markets at DBS Bank (Hong Kong) Ltd. “Investors will welcome such products.”

Yuan Appreciation

The yuan has strengthened 2.3 percent to 6.5713 versus the greenback in the past six months in Shanghai, and gained about 2.3 percent to 6.5705 in Hong Kong’s offshore market.

The city’s yuan deposit pool will be sufficient to handle demand for the gold product, Cheung said.

Members of the closely held bourse, which trades physical products, may later also approach Hang Seng Bank Ltd. to be a clearing bank, he said.

Daily bullion trading volume at the society, which has 171 active members, has jumped to HK$40 billion, a 33-percent gain from last year because of higher gold prices, Cheung said. Members include Luk Fook Holdings (International) Ltd., Chow Sang Sang Holdings International Ltd., Hang Seng Bank and HSBC Holdings Plc., he said.

Soaring Prices

Bullion prices have jumped 26 percent in the past year, reaching a record $1,444.95 an ounce on March 7, as inflation concerns and the unrest in the Middle East led investors to seek alternative investments.

The precious metal will likely trade between $1,250 and $1,350 an ounce in the short term, and may climb to as high as $1,650 an ounce later this year, Cheung said.

Sales of yuan products in Hong Kong have gained in the past year, with yuan-denominated debt, also known as dim sum bonds, reaching 35.7 billion yuan in 2010, up from 16 billion yuan the previous year, according to data compiled by Bloomberg.

The city’s stock exchange is preparing for IPOs in yuan. Li said in January his plans to sell yuan-denominated shares in a Chinese real estate investment trust is progressing well.

The Chinese Gold & Silver Exchange, which introduced electronic trading last year, will consider trading silver in yuan if its bullion product is successful, Cheung said.

The bourse, started in 1910, will mull an initial public offering later, he said, declining to provide a date.

“Going public is one of the ways to reimburse our shareholders and to introduce strategic investors,” Cheung said. “We’ve been approached by investors but the society’s model makes it difficult.”

The bourse pays out dividends from its trading commissions to members. The price of a trading license for the bourse has jumped to more than HK$5 million, after slumping to HK$200,000 in the 1990s when bullion demand fell, Cheung said.

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