China Proposes to Launch Interbank Trading for Precious Metals

According to the article, China has proposed to expand trading of precious metals from designated exchanges to the country's vast interbank market very soon. A move like this will increase liquidity and help Beijing gain stronger global pricing power for key commodities.

Dow Jones Newswires
Published July 18, 2012
Fox Business

Already the world's largest gold consumer and producer, China has long been hoping to become the next major gold trading center after London and New York, but Beijing's tight grip on commodities trading and rigid capital controls are among the obstacles in the way.

The move is also part of the broader financial reforms that Beijing has launched in recent weeks, including interest rate liberalization and securities investment deregulation, that seek to grant market forces a bigger role in both the economy and the capital market.

The Shanghai Gold Exchange has released draft rules for such interbank precious metals trading, which will include spot, forward and swap contracts for the commodities, said the person who declined to be named.

The draft rules were jointly developed by the exchange, which is the world's biggest marketplace for spot gold trading, and the China Foreign Exchange Trading System, a central bank subsidiary that oversees onshore currency trading.

According to the draft rules, the authorities are aiming to launch the interbank trading on Aug. 31, starting with gold contracts, said the person.

That would make gold the first commodity to trade on the interbank market.

The authorities will introduce a "market maker" system for the planned precious metals trading--the first time the system will be used to trade a commodity on the interbank market--with transactions done on an over-the-counter basis as compared to the exchange-based pricing mechanism.

Market makers are firms that stand ready to buy and sell a product at a publicly quoted price to facilitate trade.

An over-the-counter market would allow investors, in this case banks, to trade in large quantities that far exceed the Shanghai Gold Exchange's current trading volumes, analysts said.

According to the draft rules, banks are allowed to use the new precious metals contracts in the interbank market for proprietary trading only.

The Shanghai Gold Exchange is inviting banks, mostly members of the exchange, to submit applications to take part in the trading, said the person, adding that he expects most major and medium-sized banks to participate.

"A market-maker system and more new products in gold will help increase liquidity, which is badly needed in China's gold market these days," said the head of precious metals trading at a foreign bank in Shanghai.

At the moment, producers, consumers and investors can only trade spot and futures contracts in gold and silver on the Shanghai Gold Exchange and the Shanghai Futures exchange, respectively. The Shanghai Gold Exchange also offers spot contracts in platinum and palladium.

Due to limited membership on the two exchanges, many investors, including banks, aren't able to directly trade the precious metals on the bourses.

"If trading on the exchange is like a retail thing, then the interbank (gold) trading is just like a wholesale market," said a trader at a local bank.

The move to let banks become market makers also shows the authorities' desire to give such better-established and more sophisticated institutions more power in setting prices for major commodities, a common practice in developed markets, said Jiang Shu, senior precious metals analyst at Industrial Bank Co.

The two first contracts to be introduced for the interbank trading are AUX.CNY and AUY.CNY, namely gold with 99.95% grade and gold with 99.99% grade, according to the draft rules. Trading hours will be between 0130 GMT and 0700 GMT during weekdays.

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