Gold Trading to Begin in FTZ as CME Plans Futures in Hong Kong

Gold trading in the Shanghai free-trade zone will begin at the end of the month, while CME Group Inc. is planning a gold futures contract in Hong Kong, underscoring a push for new price benchmarks in the biggest consuming region as demand moves east.

Investors can initially trade eight existing bullion contracts on the Shanghai Gold Exchange together with three new ones in the zone through the platform when trading begins Sept. 29, Shen Gang, vice-general manager at the bourse, said at a conference in Beijing today. CME will start its one-kilogram physically-delivered contract in the fourth quarter, Harriet Hunnable, executive director for metals products, said on a conference call today.

Singapore and Thailand are also developing bullion products as more of the world’s gold is processed and used in the region and the industry discusses changes to the century-old fixing benchmark in London. Asia accounted for 63 percent of total consumption of gold jewelry, bars and coins last year, with China overtaking India as the biggest buyer, according to the World Gold Council.

“Free-trade zone gold trading marks the first time China allows the offshore yuan to be used alongside the onshore currency in a financial market,” Albert Cheng, managing director for the Far East at the council, a producer-funded group, said on the sidelines of the conference. “Given the trading volume on the Shanghai Gold Exchange, Shanghai is definitely the biggest gold marketplace in Asia and an important one in the world.”

Goldman Sachs Group Inc., HSBC Holdings Plc and Standard Chartered Plc, Australia & New Zealand Banking Group Ltd. and UBS AG are among about 40 companies given international membership to trade the Shanghai Gold Exchange’s contracts in the zone, SGE’s Shen said.

Pricing Influence

With the start of gold trading in the free-trade zone, China is seeking to exert its influence over prices while expanding the yuan’s role in global trade. The free-trade zone platform will allow overseas investors to trade SGE’s contracts at the same price and time as the mainland, according to two exchange officials who asked not be identified because of bourse policy.

“The free-trade-zone gold trading will boost use of the yuan currency, provide a platform where the onshore and offshore currencies can fuse and trade together, and help pave the way for the yuan to be a global currency,” Xu Luode, chairman of the exchange, said at the same conference today. “We’re also attempting to be a hub where gold can be traded here and then shipped elsewhere with the vault and other services in the zone.”

CME’s Contract

The government is pushing to reduce controls over the movement of capital across its borders and started the free-trade zone last year as a testing ground for liberalizing interest rates and currency transactions.

CME, owner of the world’s largest futures exchange, is listing its first physical commodities contract in the region and will open the first vault for the Comex outside the U.S., said Hunnable. The new kilogram contract will be similar in structure to the benchmark 100-ounce Comex gold futures contract, and will be physically-delivered in Hong Kong at exchange-approved vaults, she said.

Three vault companies in Hong Kong have applied to be registered with Chicago-based CME, said Hunnable. The new Comex gold futures contract will be physically-settled and delivered and will be tied directly to the price of bullion of 99.99 percent purity in Hong Kong, she said.

“Hong Kong is a gateway for the Far East bullion market. CME’s Hunnable said today. ‘‘As demand for gold continues to grow in China and the Far East, and physical bullion moves into this part of the world, the market is looking at what is specifically happening in this region and is looking for price signals and data.’’

Settlement Banks

The Shanghai Gold Exchange is China’s biggest physical bourse for the metal. Bullion of 99.99 percent purity, the benchmark, has risen 4.3 percent in 2014 after sliding 29 percent last year. Prices closed down 0.5 percent today at 247.19 yuan per gram ($1,254 an ounce).

Investors registered in the free-trade zone can take delivery of metal weighing 100 grams, 1 kilogram and 12.5 kilograms to and from vaults in the area, Xu told the conference. Shen said the exchange’s official vault in the zone is operated by Bank of Communications Co.

Industrial & Commercial Bank of China Ltd., the nation’s largest lender, Bank of China Ltd., China Construction Bank Corp., Bank of Communications, Shanghai Pudong Development Bank and China Merchants Bank Co. will provide clearing and settlement services for gold trading in the free-trade zone, Shen said. Onshore and offshore accounts will be ‘‘strictly segregated” to prevent illegal money flows, she said.

Open Market

The bourse is trying to attract banks accredited by the London Bullion Market Association, big refineries, other large institutions in the gold trade and companies that have hedging needs, Shen said. International members can either trade proprietary accounts or as a broker on behalf of their clients, she said.

The exchange plans to expand precious metals trading in the free-trade zone to include the gold deferred contract, silver and platinum and hopes to eventually lure foreign institutional and individual investors, Shen said.

“Gold is the first Chinese financial market opened to international investors, and the central bank has charged us with a mission to explore ways to boost the use of yuan in the world,” Shen, who previously worked at the People’s Bank of China, told the conference. The bourse is finalizing trading rules and will unveil details next week, she said.

— With assistance by Feiwen Rong, and Glenys Sim

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