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Shanghai launches its gold exchange

Wu Yiyao
Updated: Sep 19,2014 10:11 AM     China Daily

New contracts to trade the metal should lure more foreign investors

The Shanghai Gold Exchange started trading contracts in the China (Shanghai) Pilot Free Trade Zone on Sept 18, enabling foreign investors to participate in China’s rapidly growing bullion trading market.

The move is also expected to boost China’s yellow metal pricing power and also gave a fillip to its efforts to promote the use of renminbi globally.

Premier Li Keqiang, who visited the FTZ on Sept 18, said he has been closely following the progress of the international bourse and commended the SGE for launching trading. Li said more efforts are needed to promote the cross-border use of the yuan and also take stock of the various measures being undertaken at the FTZ.

The head of the People’s Bank of China, the central bank, Zhou Xiaochuan, and Shanghai Mayor Yang Xiong jointly pushed the button that marked the launch of the first trade. The first matched deal between SGE’s international members was completed a minute after the launch, and enabled China’s gold market to be linked to the international market.

The launch of SGE’s international bourse is widely seen as the country’s effort to open its financial market to more international investors.

The SGE yuan-denominated contracts that are traded at the FTZ will be linked to China’s domestic spot market and be available for trading for both domestic and international investors. All the contracts traded at the SGE’s international board within the FTZ will be physically backed and will be transacted in the vault within the FTZ.

Nicknamed as “Shanghai Gold”, the new contracts will add to current gold-trading varieties with new standards and trading rules.

Before the launch of Shanghai Gold, contracts with global influences included London Gold, physical gold contracts traded at London Metal Exchange, and New York Gold, futures gold contracts traded at the New York Commodity Exchange.

The new contracts of Shanghai Gold are for bullion of 99.99 percent purity weighing 100 grams and 1 kilogram, and bars of 99.95 percent purity weighing 12.5 kilograms, according to SGE’s official data.

Overseas investors will be allowed to trade eight contracts that have already been traded in the domestic board at the same price and time and under the same rules with cash as the only settlement, and transactions done in the FTZ vaults.

Market insiders and experts said Shanghai Gold may elevate China’s position in the international gold market by helping the world’s largest bullion buyer and gold consumer to establish a benchmark price in Asia.

Currently, pricing power of the precious metal lies largely with the London Bullion Market Association.

SGE’s Chairman of the Board Xu Luode said earlier this year that China as the world’s biggest consumer and producer of gold should have more pricing power to match the role it plays in the global gold market.

“We should have gold price fixing done in China itself. We need to build China’s influence in the global gold market,” said Xu.

Aram Shishmanian, CEO of the World Gold Council, said the launch of Shanghai Gold, with increasing numbers of players from all over the world, will help China gain more say over the prices of the precious metal and add vitality to bullion trading.

The SGE said in a release that the FTZ international board now has more than 40 members, including Goldman Sachs, UBS, Australia & New Zealand Banking Group Ltd, HSBC Holdings Plc and Standard Chartered Plc, many of which are also members of LME and COMEX.

To separate onshore and inshore capital in order to stabilize capital flows and manage risk exposures, foreign investors will trade the gold in offshore yuan, while domestic traders will use the onshore yuan, the SGE said.

Renminbi may potentially replace the dollar in pricing commodities, as China is moving from a regional to international market, said Jeremy East, global head of metals trading at Standard Chartered.

Analysts said the success of Shanghai Gold will largely depend on how active the trading will become.

“The garnered liquidity of the new contracts, a gauge for market recognition of prices, and a strong domestic market will add to the advantages of Shanghai Gold,” said Jiang Shu, an analyst with Industrial Bank, one of the few banks that are allowed to import gold into China.

TIMELINE

FTZ’s FIRST YEAR

Sept 29,2013

Official launch of China (Shanghai) Pilot FTZ

Sept 30

Release of 2013 version of “negative list”

Oct 9

Procedures simplified for FTZ customs declarations

Nov 22

Shanghai International Energy Exchange is inaugurated in the FTZ

Dec 2

PBOC announces guidelines to support the financial sector in the FTZ

Dec 28

Cross-border e-commerce platform starts trial run

Feb 18,2014

Cross-border yuan payments introduced for institutions

March 1

PBOC removes the upper limit of deposit rate for small-amount deposit in foreign currencies

May 22

PBOC releases detailed rules for free trade account system in the FTZ

May 25

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July 1

2014 version of the “negative list” is introduced, with restrictions cut by more than 25 percent

July 25

FTZ “basic law” passed by Shanghai legislators

Aug 21

Amazon.com Inc sets up cross-border e-commerce platform and logistics center

Sept 16

Detailed guidelines released to support capital market

Sept 18

Shanghai Gold Exchange launches Gold International Board

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