Thoughts on China's Gold Fix - BBH
Analysts at Brown Brothers Harriman noted that earlier today, China launched its first gold fix.
Key Quotes:
It
will offer a fixing twice a day going forward in yuan. The Shanghai
Gold Exchange established the fix the same way it is done in London and
New York, by prices submitted by financial institutions. In China's
case, 18 institutions, including two foreign banks, participate in the
process.
"The key question for investors: is there is some larger implication of this development that they should be aware of?
China
is the world's largest producer of gold and rivals India as the biggest
consumer. As China grows its mainland financial markets, which one day
may not simply supplement, but supplant Hong Kong, it makes sense to
expand its offerings. The fix is important because it acts as a
benchmark for contracts and other valuation.
The gold fixing
scandal is only now being resolved, and part of that appears to have
been practices that were widespread in other fixings, like LIBOR. It
further undermined perceptions of the financial industry, but it seems
to have little to do with China's decision to launch the yuan-gold fix.
Besides acknowledging the gold fix as part of China's
financial development, it may be easier to say what it isn't rather than
what it is. It does not represent an increased role of gold in China's
monetary or financial system.
The bottom line is that
neither the introduction of a yuan gold fix nor Hungary's dim sum bond
are game changers for global investors. A gold fix in yuan may help
facilitate other activity in Shanghai and broadens its role as the
mainland financial center. Hungary joins other countries in issuing a
dim sum bond, and it will be a center for yuan-clearing.
The
only reason being a center for yuan clearing is significant is because
of the restrictions China has imposed on access to its markets. This
encourages a type of rent seeking behavior as countries seek political
concessions from China (permission). There do not appear to be large
geopolitical strategic forces at work. The dollar and yuan's role in
the world economy will be the same next week and next month as they were
last week and last month."
