HK gold exchange to launch renminbi contract

The Chinese Gold & Silver Exchange, Hong Kong's century-old bullion exchange, plans to launch the first international gold contract denominated in the renminbi in early 2011.

The new contract comes as China pushes for greater international use of the currency and as Hong Kong's precious metals industry seeks to take advantage of booming gold demand on the mainland.

"In the future, after the renminbi gold bars come to the market, we might expect a 20 per cent increase [in trading volumes]," said Haywood Cheung, president of the exchange.

The exchange currently trades 3-4m troy ounces of gold per day, worth about $5bn, all of which is currently settled in the Hong Kong dollar.

One-kilo gold bars of 99.95 per cent purity have been chosen for the new renminbi contract because they are widely traded by dealers in London and New York, as well as being the standard transaction unit of the Shanghai Gold Exchange.

The trading volume in the new contract will largely depend on the extent to which the Chinese currency flows out of the mainland and accumulates in the accounts of offshore investors.

Renminbi deposits in Hong Kong surged 45 per cent in October from the previous month to a record Rmb217bn ($32.5bn), as companies in the city received renminbi through trade transactions with groups on the mainland.

In July, regulators lifted a series of restrictions blocking the free flow of renminbi in Hong Kong. Since then, companies including Caterpillar and McDonald's have sold renminbi bonds in the city while banks and asset managers have started offering renminbi-denominated hedging tools and investment products.

Hong Kong is a key route for gold to flow in and out of the Chinese mainland, which is already the world's biggest producer of the metal and an increasingly big consumer.

Founded in 1910, the Chinese Gold & Silver Exchange is the sole exchange in Hong Kong that trades spot gold. It started electronic trading in 2008 but maintains an open-outcry trading floor for its 171 members.

This month China revealed the size of the imports - more than 209 tonnes of gold during the first 10 months of the year, a fivefold increase from an estimate of 45 tonnes last year.

The exchange is not the only group aiming to capitalise on China's growing gold demand. The Hong Kong government last year set up a high-security gold vault, allowing overseas investors to store their gold in the city, while a company called the Hong Kong Mercantile Exchange is preparing to launch gold futures.

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