Trading in gold using the Chinese currency has tripled in Hong Kong this year as the yuan’s rally to a 19-year high helps limit risks for jewelers.
Average daily volume was 6.5 billion yuan ($1.1 billion) in the first five months of this year, compared with 1.8 billion yuan for the same period in 2012, according to the Chinese Gold & Silver Exchange Society, the city’s century-old bullion house. That exceeds the 4.9 billion yuan target set when the contracts were introduced in October 2011.
Yuan-based markets and financial services in Hong Kong are expanding as the city seeks to cement its status as the major offshore trading hub for China’s currency. The yuan touched 6.1276 per dollar today in Shanghai, the strongest since the government unified the official and market rates at the end of 1993. Last week, bets against gold by hedge funds and other speculators reached an unprecedented 74,432 short contracts, according to the U.S. Commodity Futures Trading Commission.
“Yuan appreciation helps as jewelers who receive yuan from clients become more willing to buy gold bars in the currency to minimize exchange-rate risks,” Haywood Cheung, president of the society, said in a May 15 interview in Hong Kong.
The yuan rose 0.5 percent this month, the best performance in Asia, as Premier Li Keqiang signaled China will unveil a plan on capital-account convertibility this year. People’s Bank of China Deputy Governor Yi Gang said in April the yuan’s trading band will be widened “in the near future.” The central bank sets a daily reference rate for the currency, which can diverge from the fixing by a maximum 1 percent.
China may double the band within a year, Ma Jun, chief economist for Greater China at Deutsche Bank AG, said at a press conference in Singapore on May 22. The nation has designated the Qianhai district of Shenzhen, a city that borders Hong Kong, as a testing ground for freer cross-border yuan usage. The yuan climbed as much as 0.1 percent today after the central bank strengthened its fixing by 0.13 percent to a record 6.1867.
A wider band for the currency will spur trading and hedging in gold denominated in it, China Gold & Silver’s Cheung said. The society may seek cooperation with Qianhai Authority in steps to develop yuan-based bullion trading, such as building a vault for the precious metal, he said.
Hong Kong relaxed yuan capital rules on banks in April and will start an interbank interest-rate fixing in the currency in June. Yuan savings in the city rose to a record 668 billion yuan in March and sales of yuan-denominated bonds amounted to 141 billion yuan this year, up from 69 billion yuan in the same period of 2012, according to data compiled by Bloomberg.
Hong Kong Exchanges and Clearing Ltd. began trading of yuan futures contracts in September. Hopewell Highway Infrastructure Ltd. raised $62 million in the city’s first additional share sale denominated in yuan a month later. Billionaire Li Ka-shing’s Hui Xian Real Estate Investment Trust held the first yuan-denominated initial public offering in April 2011.
“Although yuan gold trading volume has exceeded targets, I’m not satisfied,” said Cheung. “I wish the government could put more efforts in promoting commodity products denominated in yuan, instead of focusing so much on bonds and stocks.”
The society plans to start silver trading denominated in Hong Kong dollars in June, after a one-month trial, he said.
Bearish on Bullion
Bearish bets on bullion have increased as investors cut holdings of the metal from exchange-traded products at a record pace this year. Filings this month showed George Soros’s Soros Fund Management LLC reduced its stake in the SPDR Gold Trust, the biggest bullion-backed exchange-traded product, for a second straight quarter in the three months to March 31. Paul Singer’s Elliott Management Corp. and John Paulson’s Paulson & Co. are among investors standing by their bullish views even after they lost money on the metal.
Gold slipped into a bear market in April as some investors lost faith in the metal as a store of value and investment holdings contracted. Prices are down 18 percent this year on concern the U.S. Federal Reserve may rein in stimulus that helped bullion cap a 12-year bull run in 2012. Goldman Sachs Group Inc. forecast prices at $1,390 an ounce in 12 months while Credit Suisse Group AG said the metal will drop to $1,100 in a year. The metal traded at $1,389.94 in Hong Kong today.
“At around $1,300, there’s still some room for correction,” Cheung said. “But I see very strong support between $1,280 and $1,300. The sentiment is still not one of recovery, but I believe gold prices will start climbing again from the fourth quarter.”