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 .
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 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.
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.”
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.