China gold exchange restrictions will cut risk, not appetite


By Chris Oliver
Friday, December 30, 3011

HONG KONG -- China's decision this week to channel all gold trading through Shanghai shouldn't dampen mainland investors' appetite for bullion, even as unauthorized trading platforms are forced to close, according to analysts.

Tightened oversight of the gold market, including a ban on bullion trading apart from that directed through the official exchanges in Shanghai, comes after a year of volatile price moves for gold and silver. Unauthorized trading platforms have proliferated along with the boom in precious metals

Analysts in Hong Kong said the move is likely an attempt to bolster investor safeguards rather than to discourage investment. Some investors had complained they'd been stopped out of gold positions on unregulated exchanges without proper notification.

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"This clampdown is to try to avoid situations where the retail investors get burned because a particular exchange doesn't play by conventional rules," said Scotia Capital managing director Sunil Kashyap in Hong Kong.

Kashyap said that Chinese brokerages for the past eight months had been vocal in calling for tightened oversight of gold exchanges.

Upstart exchanges and trading platforms have sprung up across the country, many offering discount fees and lower margin requirements than those required by China's two official trading platforms, the Shanghai Gold Exchange and the Shanghai Futures Exchange.

A statement posted Tuesday on the website of the People's Bank of China cited irregular activities and evidence of illegal activity as reasons for the ban.

A Piper Jaffray sales trader, Andrew Sullivan, said the PBOC's announcement coincides with the recent trend toward tightened government oversight of key sectors and institutions in the economy.

"Gold trading is part of its economy; what [the government] wants to try and do is formalize it, just as it has done with the banks and the exchanges," Sullivan said in Hong Kong.

Mainland authorities, he added, were also concerned that gold investors don't get caught out by dysfunctional markets when the popularity of precious metals is growing.

The announcement also comes as senior officials within the PBOC have called for increased gold holdings on the government’s balance sheet.

The PBOC's research director, Zhang Jianhua, was cited as saying Monday that Beijing should use its foreign-exchange stockpile to buy gold as a hedge against inflation, adding to holdings as prices drop.

His comments, which were reported in a newsletter published by the central bank, gave no indication of what proportion of the nation's $3.2 trillion forex reserve should be allocated to investments in bullion.

Scotia Capital's Kashyap said unregulated exchanges had been popular with Chinese brokerages managing funds in remote regions of the country. He added these brokers would have little difficulty complying with the central bank's directive.

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