Abacus | Hong Kong is having another go at gold trading – here’s why it will succeed this time
HKEx will do a lot better than the failed HKMEx because the new gold futures contracts offer offshore holders of yuan the chance to park their money in gold
Back in May, Hong Kong Exchanges and Clearing announced plans to launch gold futures contracts. This is not the first time Hong Kong has tried to muscle into the market for gold derivatives. Even though China years ago overtook everyone else to become both the world’s biggest miner and biggest consumer of gold, international trading in the precious metal remains centred on London and New York. However, where previous initiatives fell short, there are reasons to believe HKEx’s new contracts stand a better chance of success.
Former boss of HKMEx Barry Cheung gets jail term quashed as court rules he’s ‘genuinely remorseful’
Certainly they could hardly fail as ignominiously as Hong Kong’s last attempt to capture a greater share of international gold dealing. The Hong Kong government has long wanted the city to offer gold futures. As far back as 2006, former chief executive Donald Tsang called on the financial community to launch exchange-traded gold contracts.
HKEx wasn’t interested. So, the government lined up then chairman of the Urban Renewal Authority, Barry Cheung, to launch an entirely new market, the Hong Kong Mercantile Exchange, or HKMEx. Trading began in 2011, just as the price of gold was surging towards its all-time high of US$1,921, which it hit in September that year. However, dealing on the new exchange never attracted critical mass, and as gold price receded, trading dwindled. By April 2013, volumes were down to just a few hundred lots a day, earning the exchange less than US$10,000 in trading fees for the month. In May 2013, HKMEx finally collapsed. And last Thursday Cheung appeared in court on charges of fraud.
HKEx will fare better. With quarterly revenues of HK$3 billion, it boasts enviable financial strength. As owner of the London Metal Exchange, it can command considerable expertise in commodity futures. And with the Hong Kong government as its largest shareholder since 2007, it enjoys powerful official backing.
Barry Cheung held in the highest regard, before the downfall of HKMEx
But the key advantage of the new gold futures will be that they can be denominated and settled in yuan. That may help to solve a problem that Beijing has faced in promoting yuan as an international currency for trade and investment.
Companies and investors were happy enough to hold yuan in Hong Kong when the currency was rising in value. After yuan appreciated 10 per cent against the US dollar in four years, the volume of yuan deposits held in Hong Kong topped 1 trillion in December 2014.
