China Goes After Dollar With Gold Fix

May, 2015

For the gold bugs out there, a quickie: China is launching a facility that allows the yuan’s value to be fixed against gold.

A gold fixing facility exists in London, but China wants its own – reflecting its ambitions as a global financial player. The establishment of a China-based gold fix for the yuan also marginally undermines the dollar as the global benchmark currency, says Jan Dehn, an economist with the Ashmore Group in London, a $70 billion asset management firm.

“The establishment of a gold fix will probably also aid China’s ambition to achieve Special Drawing Rights inclusion this year,” Dehn says about China’s ambition to become part of the International Monetary Fund’s reserve basket along with the yen, dollar and euro.

Chinese-gold-bar

Making the yuan backed by gold gives the world’s most important holders of foreign currency — central banks — an added security blanket. The gold fix, therefore, becomes another step in the internationalization of the Chinese currency.

Some see this as a direct challenge to the dollar. While a decline in the dollar’s use as a percentage of trade is already ongoing in Asia, there is also an increase in trade, which means the yuan isn’t taking dollars out of the market.

There are a lot of moving parts to making the yuan a global currency. The IMF’s decision in December is a factor, but not the major factor.

“A lot of central banks are already starting to move to the yuan,” says Justin Chan, HSBC’s co-head of markets in Asia Pacific. “At the moment, I don’t think the yuan will be a serious challenger to the dollar as a reserve currency. Surely it will never be the reserve currency. It will be one of the major reserve currencies, though,” Chan says.