Gold a ‘Good Choice’ for Boosting Global Use of Yuan (Update2)

May 28 (Bloomberg) -- China’s trade in yuan-denominated gold investment products moves the currency closer toward global acceptance and the country should develop more of them, a central bank official said.

Pricing commodities in the currency “helps China’s goal to internationalize the yuan,” Wang Zhenying, deputy director- general of the Department of Financial Management at the Shanghai office of the People’s Bank of China, said today. “Gold is a good choice to have yuan trading.”

Gold consumption in China, the world’s biggest producer, may double within the next 10 years as supplies fail to keep pace with demand from investors and the jewelry industry, the World Gold Council said in March. China, the world’s largest holder of foreign exchange reserves, is seeking greater use of its currency to reduce reliance on the dollar.

“We agree that yuan-denominated gold trading will help enhance the yuan’s global status,” Chen Shiyong, general manager of financial markets at Industrial Bank Co., said in interview today. “We also would like to be part of the efforts to increase gold investment products available to the public.”

The trading volume of the gold contract on the Shanghai Futures Exchange fell 12 percent last year, compared with an almost fourfold advance for copper, 92 percent increase in rubber and 39 percent gain for aluminum, according to bourse data.

International Status

“Although the gold market only accounts for about 1/400- 1/500 of China’s financial markets, the meaning of it is going to be significant,” Wang said. “A currency’s international status depends on its being accepted in trade and settlement and having certain financial products priced in that currency.” He said his views were his own and did not represent central bank policy.

Bullion prices have gained 11 percent in this year as the global recession and spiraling European debt crisis spurred demand for haven assets. Gold for immediate delivery was little changed at $1,214.30 an ounce at 5:53 p.m. in Shanghai. The metal reached a record $1,249.40 an ounce on May 14.

The December contract on the Shanghai Futures Exchange gained 0.4 percent to close at 267.68 yuan a gram, after earlier dipping 0.5 percent. Gold accounts for 1.6 percent of The People’s Bank of China’s $2.4 trillion total reserves, according to the World Gold Council.

China plans to expand settlements of international trade using yuan to as many as 18 more provinces and cities to meet rising demand from companies, two bankers involved in the program said this month.

Cross-Border

Authorities may permit them in areas including Guangxi in the south and Heilongjiang in the north, said the executives at Chinese state-controlled banks, who asked not to be identified before a government announcement.

Beijing started allowing companies in Shanghai and four cities in the southern province of Guangdong from July 2009 to use yuan in trade with Hong Kong, Macau and members of the Association of Southeast Asian Nations.

Full internationalization of the yuan will take 15 to 20 years, Dai Xianglong, chairman of China’s National Council for Social Security Fund, said last month. This doesn’t mean the currency will displace the dollar, which will remain dominant in the global currency system, he said.

“We have more than 30 trillion yuan worth of savings in deposits and the lack of investment products have contributed to Chinese investors going into mungbeans and garlic lately,” the central bank’s Wang said. “We can develop more gold products to attract investor demand.”

ETF Potential

China’s gold output reached 314 metric tons in 2009, ranking as the No. 1 in the world for the third year. Demand from investors and the jewelry industry, which account for 80 percent of purchases in the country, reached 423 tons in 2009, according to the World Gold Council’s data.

“China should develop its exchange-traded market instead of the over-the-counter market,” Wang said. “The financial crisis showed us the advantages of the exchange trading in terms of market concentration, timely release of information, efficiency and liquidity.”

Gold is traded in yuan on the Shanghai Futures Exchange and the Shanghai Gold Exchange.

To contact the reporter on this story: Feiwen Rong in Beijing at frong2@bloomberg.net

Last Updated: May 28, 2010 06:15 EDT