China Opens Gold Market to Foreigners Amid Price Ambition

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By Bloomberg News Sep 18, 2014 10:05 PM GMT+0800

China will give foreign investors direct access to its gold market for the first time today as the biggest-consuming nation seeks to exert more influence over prices while boosting the yuan’s global use.

The Shanghai Gold Exchange will start trading contracts in the city’s free-trade zone that will be linked to its domestic spot market and available to about 40 international members including Goldman Sachs Group Inc. and UBS AG. Access was previously limited to some Chinese units. Gold in China this year cost as much as $31 an ounce more and $42 less than the London spot price, according to data compiled by Bloomberg.

China, which overtook India as the biggest bullion buyer in 2013, wants to establish a benchmark price in Asia by opening up trading to a larger pool of investors. It’s also pushing to reduce controls over the movement of capital across its borders after policy makers pledged last year to carry out the widest expansion of economic freedoms since the 1990s.

“It’s indicative of the ambition to move the gold market more to where the consumption is,” Victor Thianpiriya, commodity strategist at Australia & New Zealand Banking Group Ltd., said by phone from Singapore. “It makes sense that price discovery occurs in the center of consumption.”

Premier Li Keqiang toured the free-trade zone today, days before its one-year anniversary. The FTZ started as a testing ground for liberalizing interest rates and boosting the yuan’s role in global transactions.

Goldman Sachs 

The gold market, which can diversify the financial market, must avoid systemic risks, Zhou Xiaochuan, governor of the People’s Bank of China, said at the opening ceremony today.

Goldman Sachs and UBS are among the first international members that also include Australia & New Zealand Banking Group, HSBC Holdings Plc, Standard Chartered Plc, JPMorgan Chase & Co., Deutsche Bank AG, Standard Bank Group Ltd. and Bank of Nova Scotia, according to a statement from the Shanghai Gold Exchange. Citigroup Inc., Societe Generale SA, Barrick Gold Corp., Newmont Gold Co. and Perth Mint are among the almost 30 institutions that may become members in the second batch, according to the statement.

Three new contracts will allow foreigners to deliver to and from the zone’s vaults. They 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 the exchange. 
The contract for the 99.95 percent purity traded at 259.6 yuan per gram on the exchange today. The bourse set the price for the contracts at 245.28 yuan a gram, according to a statement on the website. They will trade within 6 percent of the price, with the band widening to 30 percent tomorrow, according to the statement. One kilogram of gold of 99.99 percent purity traded today on the mainland at 242.90 yuan a gram.
Overseas companies will also be allowed to trade eight contracts that already exist on the domestic market at the same price and time as investors on the mainland for cash settlement only.

Currency Liberalization

Foreign investors will trade the gold in offshore yuan while those on the mainland will use the onshore currency. While the two rates typically diverge because of controls over the flow of capital, the government is testing the possibility of convergence, implying parity between the rates, according to Shi Chenbing, chief investment officer at Everbright Prestige Capital Management Co. in Beijing.

“Gold trading is seen by many as the latest attempt by the Chinese authorities to test currency liberalization,” Shi said. “This is the first time offshore yuan and onshore yuan will be treated as the same currency trading in the same pool and at parity.”

The Shanghai Gold Exchange is China’s biggest physical bourse for the metal. Bullion of 99.99 percent purity, the benchmark contract, has risen 2.4 percent in 2014 compared with a 1.9 percent advance in London prices.

Yuan-denominated gold already trades in Hong Kong. While daily average trading volumes increased to 40,494 kilograms (1.3 million ounces) in April compared with 11,282 kilograms a year earlier, they are much lower compared with London, where 19.6 million ounces changed hands on the London Bullion Market Association, according to exchange data.

“It’s going to be a challenge in terms of being able to entice traders,” Thianpiriya said. “Liquidity has always been the big challenge.”

To contact Bloomberg News staff for this story: Glenys Sim in Singapore at gsim4@bloomberg.net; Feiwen Rong in Beijing at frong2@bloomberg.net
To contact the editors responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net Phani Varahabhotla, Joshua Fellman