By Clementine Wallop
The Wall Street Journal
Friday, November 30, 2012
China will allow over-the-counter gold trading between banks for the first time Monday, a significant financial reform for the world’s second-largest buyer of the precious metal.
The move reflects the Chinese government’s latest effort to develop Shanghai into a major gold trading center, and mirrors similar developments in the country’s currency and oil markets.
The introduction of interbank trading is intended to develop China into a liquid market such as London, and demonstrates the government’s readiness to open the market to greater participation by international banks, said Jeremy East, global head of metals trading at Standard Chartered PLC.
“From a government perspective, gold is seen as currency, and the government is slowly releasing the controls on currency. We expect the [gold] market will be opened up to more foreign banks,” he said.
Given their trading volumes, Chinese banks already play a significant role in determining international gold prices, so the move will have a limited impact on prices, Mr. East said.
China offers a massive gold market, albeit one that is tightly controlled. The country is the world’s biggest gold producer and ranked as the No. 2 gold consumer in the third quarter of this year. It has official gold reserves of 1,054 metric tons, the world’s sixth-largest, World Gold Council data show. But gold exports are banned and only a handful of banks hold import licenses.
Until now member banks have been able to trade physical gold between themselves on the Shanghai Gold Exchange, but the absence of an over-the-counter market restricted them from becoming market makers in gold. In an over-the-counter market, transactions are quoted and conducted between parties on a principal-to-principal basis rather than being traded through a broker on an exchange.
Chinese gold demand has surged in recent years. The People’s Bank of China has encouraged people to buy gold while it has added to its own stockpile to diversify its foreign reserves. The Shanghai Gold Exchange is the world’s biggest platform for trading physical gold.
The introduction of interbank trading represents only a “small step” in the government’s long-term plan for its gold market, but the initial stages of interbank trading are likely to be “very limited,” said Xie Duo, director-general of the central bank’s financial market department.
“We’re trying to test the market,” Mr. Xie said.
Standard Chartered is one of the banks that will participate in interbank trading when it begins next week. Others include Chinese banks such as Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., and Bank of China Ltd., as well as Chinese units of foreign banks such as HSBC Holdings PLC.
Mr. East noted that the gold market will remain tightly regulated.
“Ultimately the gold market will open up to more banks, but it’s not going to be carte blanche,” he said. “It’s unlikely the floodgates will be opened and every foreign bank will be able to import everything they want.”
The Shanghai Gold Exchange said late Thursday that the interbank gold trading will be cleared and delivered by the bourse and will be conducted via the China Foreign Exchange Trading System, a central bank subsidiary that oversees onshore currency trading. The SGE is directly supervised by the PBOC.
The gold exchange currently offers spot and deferred prices to more than 3 million individual clients, a senior PBOC official said this month.
The opening up of the gold market comes as China is seeking to increase foreign investors’ participation in the nation’s crude-oil market. Chinese regulators said this month that they will allow qualified foreign institutional investors to trade crude-oil futures contracts planned for the Shanghai Futures Exchange.
Gold exchange-traded funds, hugely popular in Western markets, are widely expected to be the next precious metals product launched in China.
The Shanghai Stock Exchange could launch gold ETFs early next year if it receives government approval by the end of this year, the state-run China Securities Journal said last week, citing an exchange official.
ETFs have been a major source of demand for physical gold since the first gold ETF was launched in 2003. In the third quarter of this year, global gold demand from ETFs rose 56% from the same period a year earlier, WGC data showed.
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