New gold exchange aims to catapult China into ranks of global bullion centers

China's first global physical gold market opened in Shanghai's pilot Free Trade Zone ahead of the zone's first anniversary. The aim of the market is to lift China's influence over worldwide bullion prices.

Shanghai International Gold Exchange Co, a wholly owned subsidiary of the Shanghai Gold Exchange, began operation on September 18, giving foreign investors their first direct entry into China's physical gold market.

Zhou Xiaochuan, governor of the People's Bank of China, hailed the international gold-trading board as a milestone in national reforms to open up financial markets further to global trade.

The new gold exchange is also expected to strengthen Shanghai's drive to recast itself as an international financial hub on par with New York and London.

Its start launch, however, comes amid a bad patch for precious metals. The spot gold price has been on the decline this year, with the precious metal recently hitting lows not seen since the end of 2013.

The pricing mechanism of the new board is similar to those operating in London and New York, the two biggest hubs for gold pricing. Gold for spot delivery in Shanghai will be quoted in yuan.

"The launch of the Shanghai International Exchange marks a transformation," said Aram Shishmanian, chief executive officer of the London-based World Gold Council. "Shanghai will become one of the world's leading gold trading centers. Shanghai gold will influence the price and rebalance the drivers of the price today."

The new board mirrors services already available to domestic investors through the Shanghai Gold Exchange — which ranks fourth in the world in trading volume.

The main board of the bourse has 13 products, covering gold, platinum and silver. It provides quotes on spot gold and offers gold derivatives like forwards and swaps.

The international board has three yuan-denominated spot gold contracts at its start. They include bullion of 99.99 percent and 99.5 percent purity, settled in multiples of 100 grams, 1 kilogram and 12.5 kilograms, and also a 100 gram bullion bar.

Xu Luode, chairman of the gold exchange, said the product range will gradually be expanded to include silver, platinum and palladium, and more derivative contracts, including forwards and options.

Gold trading on the international board is settled and delivered separately from the main board, which operates outside the Free Trade Zone.

Overseas investors may trade gold on the main board and settle with counterparties, but they cannot take delivery of gold from the main board's warehouses. Similarly, domestic investors will be allowed to trade on the new international board, but cannot take delivery of gold outside the zone.

More than 40 global banks, gold refiners and investment institutions have signed up at the first group of members on the new bourse. They include HSBC, Standard Chartered, Scotiabank, Goldman Sachs, Deutsche Bank, UBS, Morgan Stanley, Australia & New Zealand bank, Standard Bank of South Africa, the Metalor Group, Heraeus Hong Kong and MKS Switzerland SA. A second group of 30 global institutions will usher in Citigroup and Societe Generale.

Eight Chinese banks, including the Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Bank of China, Bank of Communications and Shanghai Pudong Development Bank, will provide clearing services through free trade accounts for the international board.

The free trade account allows split accounting to separation from restricted trade accounts operating outside the zone. Free trade accounts have no capital cap on fund transfers overseas, but they do restrict fund movement to onshore accounts.

The launch of the new international board is part of government's efforts to develop Shanghai into an international intermediary trading center for gold.

Gold imports arriving at the Pudong International Airport in Shanghai have surged 200 percent, month-on-month, since June in the lead-up to the start of the new board. Some of the more active importers have bought up more than 4 tons of gold a month, according to the Shanghai Customs.

The storage fee for physical gold on the international board is 0.18 yuan (3 US cents) per kilogram per day. Bulk storage costs 200,000 yuan a month. Up to 18 tons of bullion can be stored at any one time, according to the exchange.

Shanghai-based Bank of Communications operates the only vault for the zone's gold market. It has the capacity to store more than a thousand tons of bullion.

In the first eight months of this year, customs at the airport had assisted in the clearance of 48 shipments, valued at US$16 billion.

China overtook India to become the world's biggest gold consumption market last year. Up to 1,000 tons of gold are expected to be sold here this year, according to the World Gold Council.

The council said in an earlier report that China is driving a shift from West-to-East in terms of wealth creation, economic growth, and gold production and consumption.

The Chinese gold market has grown exponentially in the last 10 years. Jewelry demand has risen 344 percent and investment demand is up over 5,000 percent. Mining supplies have risen 267 percent in the last 20 years.