Qianhai Based Physical Trading Hub Plans Revealed

It has only been seven days since we reported on the opening of the SGE yuan-based fix and already new plans are emanating from China. In another piece of the puzzle described by William Engdhal’s predictions, this week the South China Morning Post revealed that a partnership has been formed between Hong Kong’s sole exchange, the Chinese Gold and Silver Exchange (CGSE) and one of the world’s largest banks, the Industrial and Commercial Bank of China (ICBC). The intention is to provide a range of gold trading, settlement and storage services based in Qianhai. The involvement of the ICBC is largely for the purpose of providing storage utilising their existing bonded warehouse in the Qianhai free trade zone and for their import and export capabilities which benefit Hong Kong traders and manufacturers. This is however a temporary measure with further plans for a new HK$1 billion establishment that will include permanent vaulting, a trading floor and supporting administrative infrastructure which is expected to take two years to complete and rival any gold services hub in the world.

Haywood Cheung, the honorary permanent president of the CGSE was quoted as saying that the “ICBC is the largest of 15 gold importers authorised in mainland China. It is the largest bank in the mainland and has an international branch network which could provide bank clearing and settlement services”.

To understand the benefits of this new arrangement one must look at some of the shortfalls of the current system. Take for example gold used in the production of jewellery which must be transported to Shenzhen based factories from Hong Kong and Shanghai by the manufacturers; a process that can be time consuming. China has a staggering 3,000 manufacturers of this type and physical availability of gold in Shenzhen is critical as 70% of these manufacturers utilise factories based there. The new system will allow gold traded in Hong Kong, Shanghai and Qianhai to be available at the Qianhai bonded warehouse for settlement and given Qianhai’s proximity to Shenzhen, physical availability of traded gold for use in production is much improved.

Although the official reason for the partnership is to benefit Hong Kong, other benefits are obvious. The option will be available for large bullion dealers to ship their holdings from Shanghai to Qianhai for example; an option also available to wealthy Chinese who may not feel comfortable storing large physical positions in Shanghai. Furthermore, as the ICBC’s Macau branch supplies gold import and export services, the new partnership would connect Hong Kong, Qianhai and Shenzhen as described through Macau as a global gold trading hub.

If there was any doubt as to the importance of physical gold in global affairs, the news coming out of China over the past weeks has surely dispelled it. With the resources being devoted to facilitating physical trade and delivery of gold in the East, the importance of physical metal in any portfolio could not be more stark.