China will reportedly create a yuan-denominated physical gold price setting mechanism through the Shanghai Gold Exchange (SGE) by the end of the year.

According to a Reuters report, the plan aims to give China more influence over gold pricing. The country already leads the world in production and consumption of gold bullion.

SGE vice president Shen Gang made an announcement at the LBMA Bullion Market Forum in Shanghai last Thursday.

We will be introducing a renminbi-denominated fix at the right moment, we are hoping to introduce by the end of the year…We have policy support for development (of the gold market.)”

According to Reuters, sources indicate the Chinese central bank will approve the fix in the near future.

Pan Gongsheng, a deputy governor of the People’s Bank of China (PBOC), said the central bank would continue to support ‘speedy and healthy growth of the China gold market’ and its internationalization. Given its leading role in gold, China feels it is entitled to be a price-setter for bullion and is asserting itself at a time when the global benchmark, the century-old London fix, is under scrutiny for alleged price-manipulation.”

As we reported in April, Bloomberg estimates that the People’s Bank of China could now own as much as 3,510 metric tons of the metal. If true, China now has the second largest store of gold in the world, following the United States with 8,133 tons.

Officials have not released details on the fix, but according to Reuters, it would be derived through a contract traded for a few minutes with the SGE serving as the central counterparty, making the process transparent.

Sources indicated about 15 Chinese banks will initially participate in the fix. The exchange has reportedly also held talks with foreign banks.
With China’s large gold physical gold reserves, the new fix has the potential to diminish the west’s control over gold pricing and drive prices upward. As Reuters reports, this all comes at a time when the London Gold Fix remains under scrutiny for price fixing.

If the yuan fix takes off, China could compel local buyers and foreign suppliers to pay the domestic yuan price, making the dollar-denominated London fix less relevant in the world’s biggest bullion market.”