Agreement between Shanghai and Hong Kong to boost China's Gold market

A cooperation agreement between the Hong Kong Special Administrative Region (HKSAR) and Shanghai will facilitate gold trading as part of a push to elevate the role of China’s two financial centers in the global gold market.

Western markets – London, New York, and Switzerland – have dominated the gold trade for nearly two centuries. However, with gold progressively flowing from West to East, China and other Asian hubs are developing the infrastructure to challenge Western dominance.

According to a report by China Daily, the “landmark deal” signed by HKSAR Secretary for Financial Services and the Treasury, Christopher Hui Ching-yu, and Shanghai Gold Exchange Chairman Yu Wenjian will “promote long-term interconnectivity opportunities, with a more integrated renminbi-based Asian gold market in the making.”

Under the cooperative agreement, the Hong Kong Precious Metals Central Clearing Co. (wholly owned by the HKSAR government) will establish “a high-level, collaborative governance structure,” with the Shanghai Gold Exchange providing technical and regulatory input on system design, rulemaking, institutional access, risk management, and operational standards.

According to China Daily, the goal is “to ensure the efficient development of the trade-clearing system for gold and alignment with international gold standards.”

Hong Kong Chief Executive John Lee Ka-chiu said the agreement will "set in motion a cross-boundary, trade-clearing system for the precious metal,” and the goal is to create a “regional gold reserve hub.”

Hong Kong plans to launch a trial run of its centralized gold clearing system later this year. Officials will initially focus on system infrastructure and a regulatory framework before expanding the number of eligible participants.

Hong Kong also plans to expand its gold storage capacity from 200 to more than 2,000 tonnes over the next three years.

Abaxx chief economist David Greely said this all points to the fact that “the center for gold trading is increasingly moving East.”

“There is a big, untapped demand for an Asian trading hub.”

Cooperation with the Shanghai Gold Exchange will reportedly include facilitation of physical gold delivery, warehousing, and further enhancing financial connectivity between the two markets.

Last summer, the Shanghai Gold Exchange launched its first offshore gold delivery vault in Hong Kong. According to China Daily, the SGE also listed relevant gold contracts for delivery on its international board in Hong Kong, “diversifying the options of offshore renminbi assets for investors.”

Deloitte China's southern region managing partner Edward Au told China Daily the agreement "supports the gradual development of a more integrated renminbi-based Asian gold market, particularly re­levant amid geopolitical tensions, reserve rebalancing and financial fragmentation.”

He said the cooperative structure won’t likely create an immediate wave of international investment, but the deal will help make Asia's gold market more accessible and institution-friendly. 

"With consistent policy execution, deeper capital participation should emerge over time.”