Golden opportunity for Shanghai Gold Exchange

Tom McGregor

Chinese gold consumers have become key players for global demand of the precious metal. Buying gold has risen dramatically in China and India. Nevertheless, major trading floors for gold contracts are located in New York and London, but not in Shanghai. China's financial capital city hopes to upgrade its gold exchange for higher trading volumes and welcome more foreign investors.

"Financial authorities in China are considering measures which would make it easier for foreign investors to participate in the country's largely isolated derivatives market," according to the People's Daily.

It added, "a move which would hasten the integration of the local precious metal market with the global market, Xie Duo, general director of the financial market department at the People's Bank of China, said Monday at the annual London Bullion Market association conference. Xie did not offer a timeline of further details."

The announcement could hint at bigger news in the near future. Shanghai dreams of transforming into a world-class city of finance. However, its stock exchange and commodities markets have been considered 'isolationist', since officials have imposed stringent regulations and quotas on foreign investors.

However, speculation is swirling that Beijing would permit greater leeway for foreigners to get more involved with trading in the derivatives market in the city. A new dawn could be arising for Shanghai and gold markets worldwide.

Sun Yonggang explained that China's financial regulators have been reluctant in the past to open its derivatives markets for overseas investors.

Yet he said, "insulating the market has eroded the global influence of Chinese gold futures. Most contracts of their precious metals in China simply track the movements of supply and demand pressures within the domestic market. But changing a few rules would not be sufficient to attract more foreign investors to the Shanghai Gold Exchange."

At this year's annual London Bullion Market Association, the keynote speaker, Xie Duo addressed specific reforms for the Shanghai Gold Exchange, which could become a boon for foreign investments.

He outlined: Transform gold from a commodity to a financial investment market; transform it from an immediate-delivery to derivative market; and transform China's trading from a domestic to an international market."

The Dubai Chronicle reports that, "twenty-four hour trading is crucial today, the PBOC general director said. So in 2005, the SGE launched its nighttime session to overlap with the afternoon in London's physical market and morning trade in New York's Comex gold futures. Now that period - from 9 pm-2:30 am - accounts for a third of total SGE volume. It's particularly welcome for those foreign banks, which have become members of the exchange, starting with HSBC in 2008."

The Shanghai Stock Exchange is opening up at a crucial moment. The European Union sovereign debt crisis remains mired on a fiscal cliff. US federal government deficit spending seems too big too resolve. Accordingly, the global economy may stay sluggish.

A few developed nations - such as France and Japan - are struggling with its GDP dropping this year. "Japan's economy shrank by 0.9 percent in the third quarter, and 3.5 percent year-on-year, according to provisional GDP figures published Sunday," as reported by the BullionVault Website.

Additionally, President Barack Obama's re-election to the White House signals that his proposals for higher taxes could slow down the US economy and that the Federal Reserve's "Quantitative Easing" measures would continue on unabated. Excess liquidity pouring into the commodities markets could spark higher global inflation rates.

Therefore, investing in gold as a 'safe haven' could bring about higher gold prices. According to BullionVault, "Spot Market gold prices hovered just below $1,738 an ounce on Monday morning in London, close to three-week highs."

Perhaps, a bullish market for gold will prevail and the Shanghai Gold Exchange can take the bull by the horns by implementing much-needed reforms and open its trading floor to more foreign investors.

The views do not necessarily reflect those of China Daily.

Mcgregor@chinadaily.com.cn 

Tom McGregor's previous articles:

ICBC hops into Australia

Samsung eats into Apple's dominance

China wealth fund pivots to Asia

Daunting challenges ahead for Chinese solar companies