In times of economic uncertainty gold is habitually used as a means of light to safety the recent explosion in demand for the precious metal has been largely in response to global economic turmoil resulting from the financial crisis of 2008. Not only does it offer speculative opportunities, it also provides a hedge against inflation, deflation and currency devaluation. China demand for gold is ever increasing and rose almost 40 percent in the second quarter of 2011, compared to the same quarter in 2010, according to an article by the Financial Times.
In a move to endorse the international use of its currency and provide an alternate reserve currency to the troubled dollar and euro, since October 17th, the Chinese Gold & Silver Exchange Society (CGSE) has commenced the facilitation of offshore RMB spot gold contracts, in the form of the Renminbi Kilobar to investors. Haywood Cheung, president of CGSE explained to Bloomberg, "by attracting both local and international investors, the Renminbi Kilobar Gold is a significant step towards internationalizing the renminbi."
The increased demand for RMB investment products has been fuelled by both the expansion of the Chinese economy and the overall shift by China government towards internationalizing the renminbi. In relation to the success of the overall uptake of the product, Kelvin Lau, of Standard Chartered Bank said, o long as the trade settlement channels remain open there will be no problem as the depth of deposits (some 600billion RMB) that are accessible would continue to encourage financial product innovation.
According to financial consultant Fung Chi-kin; Hong Kong-based RMB gold trading will offer mainland investors an opportunity to take any arbitrage opportunities from possible price discrepancies existing between Shanghai and Hong Kong. From an international investor perspective, arbitrage may be taken by purchasing gold in a foreign currency and selling in yuan.
This is yet another step by the Chinese government in establishing the renminbi as a trade currency since they began the relaxing of capital flow regulation to Hong Kong in 2010, allowing certain RMB denominated bond issuances. Last April, the first renminbi valued initial public offering took place when Hui Xian (a real estate investment trust) began floating on the Hong Kong stock exchange in RMB. Along with this, China's Vice Premier Li Keqiang announced plans to permit foreign companies meeting certain criteria, to purchase up to 20 billion yuan worth of Chinese stocks and bonds from the Hong Kong exchange.
However, the existing capital controls maintained by the Chinese central Government may well pose liquidity issues; as a currency in limited supply could pose significant liquidity risk to investors. To combat this, Cheung of the Hong Kong exchange said the exchange is putting an upper limit on trade of 300 Kilos per day. This would avoid any sudden loss of liquidity, if delivery were demanded on gold bars. he sudden influx into gold bars may take away half of the liquidity in Hong Kong, he said, in an interview with Bloomberg. He stated that estimates suggest daily trade could reach 300 million yuan over the next six months in the exchange.
