Gold trading to open up to foreigners in Shanghai


By Daniel Ren
South China Morning Post, Hong Kong
Monday, March 17, 2014

SHANGHAI -- The Shanghai Gold Exchange is poised to get the jump on other mainland equity and commodity trading bourses by launching a gold trading platform in the city's free-trade zone open to foreign investors.

Rules on the gold exchange's "international board" are being reviewed by the central bank and the foreign exchange regulator, and an imminent approval is expected, according to exchange officials.

The platform, likely to get under way in the second half of this year, will mark a major breakthrough in the development of the free-trade zone, the mainland's first free port.

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The trading platform and the warehouse will be run separately from the existing trading system in Shanghai's downtown Huangpu district, and the products will be denominated in yuan, part of Beijing's efforts to internationalise the currency.

Spot and forward gold trading will be conducted on the "international board" as analysts foresee a keen interest from foreign traders.

Foreign players will be invited to conduct gold trading, with liberalisation in the sector seen as creating arbitrage opportunities for them.

"Gold will be an ideal trading product to spearhead the efforts to internationalise all kinds of exchanges in the free-trade zone," said Jiang Shu, a gold analyst at Industrial Bank. "The precious metal could trigger a large turnover when the international players come."

Jiang, who has seen the draft rule, said domestic individual investors would not be allowed access to the platform initially.

The central bank and the foreign exchange regulator were expected to grant an investment quota to overseas players for gold trading in the zone, he added.

The Shanghai Gold Exchange will soon register a subsidiary, International Gold Trade Centre, in the trade zone to operate the new trading system.

Foreign institutions and individuals could open accounts in the zone that are designated for gold trading.

China became the world's largest gold consumer last year, overtaking India, after large falls in global prices prompted bargain hunting across the country.

Domestic gold consumption reached 1,176.4 tonnes last year, up 41.4 per cent from 2012.

The country produced 428.1 tonnes of gold last year, remaining the top gold producer for a seventh consecutive year.

Shanghai launched the free-trade zone in September last year under Premier Li Keqiang's plans to use the 28.78-square-kilometre territory as a test bed for further economic reforms.

Beijing has promised to make the yuan convertible under the capital account in the zone but has yet to give the go-ahead on this step to institutions and individuals based in the zone.

A liberalised capital account could let foreign investors trade yuan-denominated equities, financial futures and commodity futures - all of which are now off-limits to them. But financial regulators remain concerned over the prospect of a surge in hot money inflows prompted by a fully convertible yuan.

The Shanghai Futures Exchange set up a 5 billion yuan (HK$6.3 billion) subsidiary, Shanghai International Energy Exchange, in the free-trade zone in November last year. Yuan-denominated crude oil futures will be traded on the exchange.

Foreign investors will be allowed to participate in crude oil futures trading as the mainland strives to gain pricing power on the key energy product.

But sources said it would be some time before the regulators finalised a detailed trading framework.

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