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Offshore gold contracts to be traded in FTZ

China Daily, June 5, 2014

• Offshore gold contracts denominated in renminbi, the Chinese currency, will be traded in the China (Shanghai) Pilot Free Trade Zone later this year, top officials of the Shanghai Gold Exchange said on Wednesday.

  The People's Bank of China, the central bank, had in May given the green light for setting up an "international board" for gold trading at the Shanghai FTZ.

  SGE officials indicated that the plan to accept offshore renminbi-denominated investments will speed up the Chinese currency's internationalization process and make the Chinese bullion market more accessible to overseas investors.

  SGE is the world's largest physical gold exchange and handles most of the gold transactions that take place in China.

  The central bank statement had indicated that the various categories of gold being traded at the SGE would also be made available on the international board. SGE officials said that most of the preparations are in place and the bourse remained confident of starting trading at the FTZ by the end of the year.

  Registration of the Shanghai Gold International Exchange, technical preparations and recruitment of international members would be completed by the end of the third quarter.

  Xu Luode, head of SGE, indicated that Shanghai will now play a much bigger role in the international bullion market, adding that the international board and the SGE would follow the same pricing mechanism.

  "As trading volumes pick up, the FTZ will have a much bigger role globally. Shanghai may become the third - largest international gold trading hub after New York and London," said Xu.

  China became the world's largest gold consumer in 2013 after overtaking India. According to data provided by the China Gold Association, China consumed 117.6 metric tons of the precious metal in 2013, a 41 percent growth over the same period in 2012. China was also the world's largest gold producer for the seventh consecutive year in 2013.

  Despite the country's large consumption and production of gold, China's pricing power of the precious metal is yet to grow, and the FTZ's international board could well prove to be the catalyst for it, said market insiders and analysts.

  "China has developed various tools and product categories for trading precious metals, but overseas investors were not well involved due to lack of proper channels," said Long Ling, futures analyst with the Shanghai-based Industrial Futures Co Ltd.

  Gold trading in China is currently open to domestic investors and dominated by onshore renminbi. It is expected that trading volumes will pick up after trading begins at the FTZ and more international investors come in.

  SGE is also building a vault in Shanghai that can stock up to 1,000 metric tons of precious metals within the FTZ.

  Dai Haibo, deputy director of the FTZ administration committee said several exchanges will be set up within the pilot trading zone.

  "China Foreign Exchange Trading System & National Interbank Funding Center, China Financial Futures Exchange, Shanghai Clearing House and Shanghai Equity Exchange are expected to start operations within the FTZ soon, and this will come in handy for the FTZ-registered and other international investors," said Dai.

  These moves will also further China's financial market reforms and bolster trade, Dai said.

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