Tag Archives: silk road

Kazakhstan & China Join Forces In Gold Market

Silk Road Gold Trading Kicks Off

The other day I bumped into a small but potentially important news item on the website of the Shanghai Gold Exchange. The article was published in Mandarin, of course, as the Chinese (authorities) hardly ever publish valuable information in English – most articles published in English have been intentionally written to communicate what the State Council wants the West to hear. In the article it’s described a financial delegation from Kazakhstan visited the Shanghai Gold Exchange (SGE) to discuss cooperation in gold trading along One Belt One Road (OBOR), also referred to as the new Silk Road, that reaches over the whole Eurasian continent. From the SGE (exclusively translated by BullionStar):

A group led by Kairat Kelimbetov, the Chairman of the Board of Directors of the Kazakhstan International Financial Center, visited the Exchange

At noon on 26 February 2016 a group led by Kairat Kelimbetov, President of the Astana International Financial Center and former President of the National Bank of Kazakhstan, visited the Shanghai Gold Exchange and held talks with President Jiao Jinpu. Both parties reached consensus on strengthening cooperation and seeking development in the gold market under the “One Belt One Road” project. Zuo Qihan, Kazakhstan consulate general in Shanghai, Shen Gang, Vice General Manager of the Exchange and Zhuang Xiao, CTO, attended the meeting.

Although the article lacks any detail, we can discover its potential impact if we study the financial and political backdrop.

Kelimbetov has an impressive track record. Previously he served as the Minister of the National Economy, Deputy Prime Minister and Governor of the National Bank of Kazakhstan. Currently, he’s the head of the brand new Astana International Financial Center (AIFC) that was officially launched in January 2016, aimed to become one of the top 10 financial centers in Asia and one of the top 30 financial centers in the world by 2020. The government of Kazakhstan contributes full support to the AIFC .

Kairat Kelimbetov and Jiao Jinpu at the SGE
26 February 2016, on the left SGE President Jiao Jinpu, in the middle AIFC President Kairat Kelimbetov. Courtesy SGE.

The main language spoken at the AIFC is English and the center includes an independent court for financial and investment disputes using English law. Kenneth Rogoff, Professor at Harvard University and former chief economist at the IMF, has said with English law at the basis the AIFC will be a game changer.

The AIFC decree signed in May 2015 at the Astana Economic Forum (AEF) by the President of Kazakhstan, Nursultan Nazarbayev, commands the National Bank of Kazakhstan and the Kazakhstan Stock Exchange to relocate from the city of Almaty to Astana. The AIFC will be installed on the premises of the EXPO 2017 starting from 1 January 2018.

At the AEF Nazarbayev stated the financial crisis that broke out in 2008 is systemic and will only end when the key cause is eliminated: the profound accumulated imbalances in the currency markets. He added that these hidden, latent roots of the crisis have spawned currency wars and economic wars in the form of sanctions hurting many countries. Nazarbayev said, “This is what generates an increase in confrontation between East and West, the U.S. and NATO against Russia and China, … deep reforms are needed for sustained economic growth.”

Nazarbayev may 2015 AEF
Nazarbayev speaking at the AEF 22 May 2015.

Nazarbayev has always been a vocal critic of US supremacy and an advocate of gold. Under his guidance, in 2011 the National Bank of Kazakhstan has taken the pre-emptive right to buy all domestic gold mine output to strengthen its international reserves and develop the local gold industry. In 2012 a (third) large gold refinery, Tau-Ken Altyn, was erected as one of the key projects of the Astana Industrial Park, to ensure all domestic mine output can be refined in Kazakhstan.

President Nazarbayev paid a visit to the Tau-Ken Altyn refinery in December 2013, as can be seen in the video below starting at 1:13. Tau-Ken Altyn can produce 12.5 Kg investment bars for the central bank, as well as 100 gram and 1 Kg bars for personal investment.

Although official documentation is lacking, from the news item at the SGE website I assume the AIFC has included the Shanghai International Gold Exchange (SGEI) for servicing gold trading in renminbi – supporting the internationalization of the renminbi.

It’s unclear if the AIFC has exclusively attracted the SGEI platform for gold trading. On 11 March 2016 Kelimbetov visited London where he held a meeting with the heads of UK government institutions, large investment banks (Goldman Sachs, Morgan Stanley, UBS) and international financial organizations to discuss the AIFC’s progress. Though, Kazakhstan is likely to prefer cooperating with its Chinese partner in gold business, as both nations share a common interests of making a fist against US dollar domination.

The central banks of Kazakhstan and China are among the most aggressive gold buyers in the world. Since 2010 the official gold reserves of Kazakhstan have grown from 67 metric to 222 tonnes. In turn, over the same time horizon China has increased its official gold reserves from 1,054 tonnes to 1,762 tonnes, according to official statistics – it’s thought China’s central bank has significantly more gold than it publicly discloses.

Kazakhstan & China Gold Reserves 2011 2015

The central banks of numerous other countries in (central) Asia are buying gold as well, in example Russia, Belarus, Tajikistan, and Kyrgyzstan, sharing an objective to diversify foreign exchange reserves and unwind the US dollar hegemony.

But increasing their official gold reserves is not all these countries do, it’s part of something bigger. In recent years a vast movement of economic collaborations between countries in Eurasia has unfolded. One of these collaborations is the Silk Road economic project (/OBOR) that was launched in 2013. Partially funded by China’s foreign exchange reserves the project focuses on connectivity and cooperation among countries in Asia, Europe and Africa. Aside from its independent activities OBOR also provides the structure to connect other collaborations, of which the most relevant ones are:

  • The Shanghai Corporation Organization (SCO). The SCO is a political, economic and military alliance, comprising the member states Russia, China, Kazakhstan, Tajikistan, Uzbekistan and Kyrgyzstan, that was launched in 1996.
  • The Eurasian Economic Union (EEU). Launched in 2014 the EEU members Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan now form a space that is modeled on the European Economic Community.
  • The Asian Infrastructure Investment Bank (AIIB). The AIIB is an international financial institution, erected to support the building of infrastructure in the Asia-Pacific region, launched in 2015 counting 57 prospective founding members. Most Asian (except Japan) and European countries participate in the AIIB.

If we look closely we can observe that China is slowly pushing for more integration of the clubs mentioned above with OBOR. For example, in May 2015 Xi Jinping and Vladimir Putin signed a decree on cooperation in tying the development of the EEU with OBOR and in December 2015 the first discussions were held to integrate the SCO with OBOR. (Chinese state press agency Xinhua has a dedicated Silk Road web page that covers developments regarding OBOR and the SCO, EEU and AIIB.)

Kazakhstan recently opened a logistics terminal in Lianyungang, China, and completed the construction of its Zhezkazgan-Beineu railway to create a better connection for China through Kazakhstan to the Caspian seaports. “All these projects are aimed at increasing the transit potential of both our country and the whole of the Eurasian Economic Union,” said Nazarbayev at the AEF on 22 May 2015. “This is the new Silk Road. Forty countries have showed an interest in free trade with the Eurasian Economic Union. But we must not stop there. I propose to create a new … Eurasian transcontinental corridor.”

Screen Shot 2016-03-15 at 11.23.11 pm
Kazakhstan has a strategic position in Eurasia.

Coincidentally, also on 22 May 2015 the Silk Road Gold Fund was launched at a conference in Xi’an, China, with the subject of “Serve the New Strategy of the Silk Road, Lead the New Development of Gold”. From iFeng we can read (exclusively translated by BullionStar):

Representatives from gold and financial institutions talked freely about bringing gold’s superiority into full play, seizing the historic and strategic opportunity of One Belt One Road [OBOR], strengthening bank-enterprise cooperation and financial-industrial combination, and leading the transformation and upgrading of the gold industry under the economic background of the new normal.

Time will tell to what extent the cooperation between the SGEI and the AIFC will execute what this quote describes. Namely, increasing gold business in the economies along the Silk Road.

A few days later in May 2015 China unveiled the Silk Road Gold Fund to the English-speaking world. From Xinhua:

The fund, led by Shanghai Gold Exchange, is expected to raise an estimated 100 billion yuan in three phases.

…Among the 65 countries along the routes of the Silk Road economic belt … there are numerous Asian countries identified as important reserve bases and consumers of gold.

…About 60 countries have invested in the fund, which will in turn facilitate gold purchase for the central banks of member states to increase their holdings of the precious metal, …

I’m not sure if the National Bank of Kazakhstan will buy its gold through the SGEI anytime soon, more likely some of Kazakhstan’s gold production will be sold through the Chinese exchange.

From all information presented above the intensions of China and numerous Asian countries with respect to gold and the Silk Road are clear. Through OBOR China will not only use its foreign exchange reserves for infrastructure in Eurasia to boost growth and strengthen economic ties and in the region, additionally, gold business is developed and gold is promoted as a key reserve currency.

China Rapidly Changing International Gold Market  

Since 2007 China has the largest domestic gold mining output, since 2011 the Shanghai Gold Exchange has been the largest physical gold exchange and in 2013 and 2014 China was the largest importer. Now the Chinese seek to escalate pricing power.

From the beginning of the liberalization of China’s gold market in 2002, the governor of the People’s Bank Of China has been strikingly honest – compared to his Western colleagues – regarding his view on gold. At the LBMA conference in 2004 governor Zhou Xiaochuan stated gold is a currency, an indispensable investment tool and the gold market – together with the securities and foreign exchange market – constitute the main part of the financial market.

As of today, China has fully developed its domestic gold market and is aiming to further integrate with the international gold market – inter alia to support the internationalization of the renminbi – as was planned more than a decade ago. From Zhou in 2004:

China’s gold market must integrate into the global market. Therefore China will further open up the market and quicken its steps toward integrating into the international market.

China’s aim is … to establish a safe and effective system for gold trading and to give full play to the gold market’s function of investment and risk warding, thus promoting the development of China’s gold market. We will strive for this aim with members from the international financial industry, and in particular, the global gold fraternity.

The Chinese gold market has come a long way since the launch of the Shanghai Gold Exchange (SGE) in 2002 to the launch of the Shanghai International Gold Exchange (SGEI) in 2014. From no gold market whatsoever before 2002 to an international gold market has been a meaningful accomplishment. When Zhou attended the opening ceremony of the SGEI in 2014 he said:

This event [the launch of the SGEI] is a major milestone in China’s opening of its financial market to foreign investors. The Shanghai International Gold Exchange will bolster China’s gold market toward greater trading volume and further highlight the price discovery function of the gold market.

In order to move the center of gravity of the international gold market towards Shanghai, the Chinese are pursuing to increase (paper) trading volume in renminbi – through the Shanghai International Gold Exchange (SGEI), attract global supply to be sold through the Shanghai Free Trade Zone, have a renminbi denominated gold fix and improve the connection between the Chinese gold market with the international gold market.

Recurrently, China likes to play multiple hands at the same time: on June 16, 2015, the Bank Of China became the first Chinese bank to participate in the LBMA Gold Price auction process, formerly know as the London Gold Fix. Industrial & Commercial Bank Of China (ICBC) is considering to join the fix as well. By joining the LBMA Gold Price auction the Chinese aim to influence the Western side of the international gold market to a larger extent, most notably the London Bullion Market  which has much weight in setting the international gold price. Concurrently, China is said to be launching its own gold fix in renminbi this year; the PBOC is expected to give approval for a renminbi denominated gold fix anytime now. The multiple hands strategy can also be detected as China is pushing to increase power within Western dominated multilateral institutions such as the International Monetary Fund, while at the same time establishing new multilateral institutions such as the the Asian Infrastructure Investment Bank.

Along the lines of spreading engrossment the SGE has disclosed on June 25, 2015, at the LBMA forum in Shanghai to be in discussions with CME Group (COMEX) about listing each other’s contracts. Allegedly, an agreement will be signed this August and trading may start in the first quarter of 2016. Shen Gang, Vice President of the SGE, has stated her exchange will open a trade link with the Chinese Gold & Silver Exchange Society in Hong Kong and the Dubai Gold & Commodities Exchange as well.

Trading volume on the SGE for the first half of 2015 reached a record of 8,778 tonnes, up 200 % year on year, up 55 % from the second half of 2014 (including OTC trading that was settled through the SGE).

SGE weekly gold volumes

Perhaps the most intriguing recent development is the new Silk Road Gold Fund, a 100 billion yuan fund to be led by the SGE – including a Gold ETF Fund, Gold Resource Merger and Acquisition Fund and Gold Investment Fund, which will facilitate gold purchases for the central banks of Silk Road member states to “serve the strategy of the Silk Road and lead the new development of gold”. Official information on the Gold Fund is hard to come by, the best intelligence I could find was an English piece on Xinhua and a Chinese report of the Gold Fund launch event on iFeng (exclusively translated by BullionStar). IFeng wrote:

Representatives from gold and financial institutions talked freely about bringing gold’s superiority into full play, seizing the historic and strategic opportunity of the One Belt And One Road [Silk Road], strengthening the bank-enterprise cooperation and financial-industrial combination, and leading the transformation and upgrading of the gold industry under the economic background of the new normal.

The holding of the conference enhanced the communication and cooperation between the western gold industry and countries along the line of the One Belt And One Road, clarified the development direction of the gold industry under the economic background of the new normal … and unlocked a new chapter of the gold industry development.

This can be a paradigm shift as one of the institutions that are identified with the Silk Road initiative is the Asian Infrastructure Investment Bank, that has been allied by 57 nations (of which many are Western but with the United States and Japan absent). The Gold Fund is likely to drive gold business through the Shanghai International Gold Exchange.

AIIB silk road

Gold business developments not yet directly related to the Gold Fund, but at this stage said to be part of the Silk Road initiative, are mining collaborations in the Asian region. On May 11, 2015, Chinese gold miner, China National Gold Group Corporation, has announced it has signed an agreement with Russian gold miner Polyus Gold to deepen ties in gold exploration. The cooperation will include mineral resource exploration, technical exchanges and materials supply.

In addition, Chinese mining companies are on a buying spread acquiring other companies: Zijin Mining Group has bought a 50 % stake in Barrick Gold Corp’s Porgera mine in Papua New Guinea for $298 million on May 26, 2015. In Australia, the world’s second largest mining country, Zijin Mining Group already owns Norton Gold Fields and has recently launched a bid for Phoenix Gold next door. Zijin has announced to issue shares worth 10 billion yuan ($1.61 billion) for future acquisitions. From George Fang, Zijin Mining Group Executive Director and Vice President:

Gold is our game. The company is open to opportunities around the world.

Furthermore, on July 1, 2015, the LBMA and the SGE mutually recognized the specifications of 9999 kilobars, the preferred gold bar in China, which will enhance connectivity between the Shanghai gold market and the rest of the world. I wouldn’t be surprised if eventually 9999 kilobars become London Good Delivery. Specifications for Good Delivery have been changed before; in 1954 coin bars (either 899 – 901 or 915.5 – 917 fine) were removed from the Good Delivery list. Currently, only 995+ fine bars weighing 350 – 430 ounces can be subjected to Good Delivery status, but there is no reason why this can’t change.

Gold Fund To Serve The New Strategy Of The Silk Road, Lead The New Gold Development

Not surprisingly there is little official documentation on the recently launched Silk Road Gold Fund. However, the translation below (original article published on ifeng) provides an intriguing insight at what this Fund is about. On May 22 Chinese financial policy makers from the PBOC, Chinese gold industry executives from commercial banks, mining companies, the Shanghai Gold Exchange and the China Gold Association together with representatives of the Western gold industry discussed gold’s future role in finance and how it will serve the New Silk Road Initiative.

Representatives from gold and financial institutions talked freely about bringing gold’s superiority into full play, seizing the historic and strategic opportunity of the “One Belt And One Road”…

The holding of the conference enhanced the communication and cooperation between the western gold industry and countries along the line of the “One Belt And One Road”, clarified the development direction of the gold industry under the economic background of the new normal … and unlocked a new chapter of the gold industry development.

Largest Domestic Special Fund of Silk Road Positioned in Xi’an For Assisting “One Belt And One Road”

May 25, 2015, 08:34

Source: ifeng Shaanxi

Goldfund 1
“One Belt And One Road” Conference of Promoting Gold Industry Development was held in Xi’an
Goldfund 2
“One Belt And One Road” Conference of Promoting Gold Industry Development was held in Xi’an

In the afternoon of May 22, the “One Belt And One Road” Conference of Promoting Gold Industry Development & Launching Ceremony of Silk Road Gold Fund hosted by Shanghai Gold Exchange and Shaanxi Provincial Government and co-hosted by Shaanxi Gold Group Incorporation Co., Ltd. was held grandly in Xi’an. As an important part of the Investment & Trade Forum for Cooperation between East & West China and the Silk Road International Expo agenda, the conference officially initiated the Silk Road Gold Fund with the subject of “Serve the New Strategy of the Silk Road, Lead the New Development of the Gold”; discussed the innovative thinking and specific measures on grasping the great development opportunities of “One Belt And One Road” and enhancing the synergetic development with the gold industry of the countries and regions along the line of “One Belt And One Road” under the new normal of the economy, and initiated the new era of the gold industry development.

Wei Minzhou, Standing Committee member of Shaanxi Province and municipal party secretary of Xi’an, attended the conference and gave a speech; deputy head of the financial market department of People’s Bank of China Zou Lan gave a speech about the consistent support on the sustainable and healthy development of China’s gold market; vice president of the Shanghai Gold Exchange Song Yuqin made a keynote speech that profoundly analyzed the development direction of China’s gold market and the policies on the gold industry; Sun Feng, chairman of the Shaanxi Gold Group, addressed the development report of the Shaanxi Gold Group; vice president of precious metal department of Industrial and Commercial Bank of China Qiu Yi gave his report on how to adapt to the new normal and how to develop new business. Chairman of Shaanxi Non-ferrous Metal Holding Group Co., Ltd Huang Xiaoping, vice chairman of China Gold Association Cui Jianguo, president of Industrial and Commercial Bank of China Shaanxi Branch Shang Jun, president of Bank of China Shaanxi Branch Li Ruiqiang, Industrial Bank Co., Ltd. Xi’an Branch Guo Qiujun and president of Industrial and Commercial Bank of China Sinkiang Branch Sun Jianyong gave their speech successively; Chen Yumin, general manager of the Shandong Gold Group, introduced the basic information of the Silk Road Gold Fund. Representatives from gold and financial institutions talked freely about bringing gold’s superiority into full play, seizing the historic and strategic opportunity of the “One Belt And One Road”, strengthening the bank-enterprise cooperation and financial-industrial combination, and leading the transformation and upgrading of the gold industry under the economic background of the new normal.

During the conference, vice governor of Shaanxi Provincial Government Wang Lixia and vice president of the Shanghai Gold Exchange Song Yuqin signed the agreement of comprehensively enhancing the strategic cooperation of the gold industry, which indicated promoting the Shaanxi gold industry to be superior and strong by establishing the fixed cooperative mechanism, setting up gold trading center, etc. Shaanxi Gold Group signed the comprehensive strategic cooperation agreement with 8 banks as Shaanxi Branch of ICBC, Sinkiang Branch of ICBC, Shaanxi Branch of CCB, Shaanxi Branch of Bank of China, Shaanxi Branch of Bank of Communications, Xi’an Branch of Industrial Bank Co., Ltd., Bank of Xi’an and Shaanxi Rural Credit Cooperative Union.

As an important agenda of this conference, Shandong Gold Financial Holding Capital Management Co., Ltd., Shaanxi Gold Group Incorporation Co., Ltd., China Industrial Asset Management Limited, China Industrial Wealth Asset Management Limited, Western Capital Investment Co., Ltd. and Shenzhen Gold Information Group Co., Ltd. signed the Sponsorship Agreement of the Xi’an Silk Road Gold Fund Management Co., Ltd. The guests activated the specially designed trigger and initiated the Silk Road Gold Fund in the form of turning stone into gold by touching. The Silk Road Gold Fund, with the Shanghai Gold Exchange as the leading initiator and the win-win cooperation of the Shandong Gold Group with the strongest comprehensive strength in domestic gold industry and the Shaanxi Gold Group with regional advantage, attracted large financial institution to work together on its establishment. “The Silk Road Gold Fund” (hereinafter short as “Fund”) will raise and manage one mother Fund and several sub-Funds, including a Gold ETF Fund, Gold Resource Merger and acquisition Fund, Gold Investment Fund, etc. The Fund will be issued in 3 phases with the first phase as 5 billion yuan, second phase as 30 billion and estimated gross as 100 billion, and it will become the largest gold fund in the domestic gold industry.

The holding of the conference enhanced the communication and cooperation between the western gold industry and countries along the line of the “One Belt And One Road”, clarified the development direction of the gold industry under the economic background of the new normal, and facilitated the western gold industry and gold market to grasp the opportunity under the motivation of the grand pattern of “One Belt And One Road”, it added new vitality and injected new energy to the prosperity of the development of the gold industry and gold market of China, and unlocked a new chapter of the gold industry development.