On September 29th, the Shanghai Gold Exchange plans to launch its international board, in the new free-trade zone of the city. The highly-anticipated move is seen as an effort to inject foreign capital into China’s gold market and should amplify the country’s influence on market prices.
The exchange will initially allow 40 members and offer 11 gold contracts, all denominated in the yuan. These yuan-denominated gold contracts will open up exposure of the currency to international investors, but its price will still be closely regulated by the People’s Bank of China.
As the world’s largest producer of gold, China also places strict regulations on the amount of gold that can be brought into the country. Last year, China was also the world’s largest consumer of gold.
Far East Managing Director for the World Gold Council, Albert Cheng told the Wall Street Journal last year, “China’s gold demand will continue to rise, spurred by a recent relaxing in import rules and government policy announcements that favor a greater role for market forces” but reports by the WGC for 2014 have deceptively indicated a slump in physical demand.
Why would gold demand in China be down, when everyone, including the WGC has been predicting it would continue to rise? Turns out, it’s not down at all.
Earlier this year, Reuters reported that China is actually hiding the amount of gold it is importing:
“China has begun allowing gold imports through its capital Beijing, in a move that would help keep purchases by the world’s top bullion buyer discreet at a time when it might be boosting official reserves. The opening of a third import point after Shenzhen and Shanghai could also threaten Hong Kong’s pole position in China’s gold trade, as the mainland can get more of the metal it wants directly rather than through a route that discloses how much it is buying.”
The Shanghai Gold Exchange will also operate a storage facility in the free trade zone that will be able to accommodate up to 1,000 tons of gold, to allow foreign entities to locally store the precious metal to better facilitate trading. The free trade zone is an 11-square-mile area created to be a “testing ground” for the country’s economic sector.
In July of last year, the Shanghai Futures Exchange began allowing night-trading for its gold contracts in an effort to better align with global price movements and in 2011, the PBoC opened up interbank gold trading; both as part of efforts to gain influence over international pricing.
Opening up gold contracts to foreign investors is not the first time China has attempted to gain influence in commodity pricing. The Bohai Commodity Exchange offers yuan-denominated iron ore contracts and the Shanghai Futures Exchange has announced plans for a crude oil futures contract.