Shanghai Free Trade Zone to Offer Gold Trading as China Goes Global

Global commodity traders will get a chance to access China's restricted financial markets as the country opens its doors through the new Shanghai Free Trade Zone (SFTZ). The country's main commodities trading venue, the Shanghai Gold Exchange (SGE) will issue contracts from the end of this month to be traded at the new financial center. The move is revolutionary for China's internationalisation process.

The SGE's Chairperson, Xu Luode, spoke about the new developments during an industry conference in Beijing on the eleventh of September. The exchange will offer traders a variety of instruments, commencing with eleven contracts with three yuan-denominated physical gold contracts of 100 grams, 1 kg and the bigger London gold delivery bar which weighs in at 12.5 kg.

China is the world's largest gold consumer and producer, but tails behind rivals such as India in the contract's domestic trading.

The latest offering is the start of China's journey in free-market trading, and it is gradually allowing overseas participants entry. The SGE head also spoke about its expansion plan during the conference, with the extension of its product offering.

Gold has been on a roller coaster ride as the global financial crisis of 2008 triggered a spike in the contract, thus giving traders a run for their money. The price of gold crossed a record high of $1,900 in 2011.

The summer slowdown impacting the global financial markets have also affected commodities markets. In its latest quarterly repeat, the World Gold Council commented about the recent trends impacting the market: "In line with our expectations,1 Q2 gold demand of 963.8 tonnes (t) was considerably weaker year-on-year – 16% below Q2 2013’s 1,148.3t. Sharp declines in the consumer segments of gold demand came as no surprise, given the stark contrast in conditions in the global gold market between the two time periods."

Shiv Kumar, a Dubai-based precious metals trader, commented about the implications of the new gold contracts denominated in the yuan; "Get ready for trading in dollar yuan. The current initiative is a mirror image of what happened in India's gold market. Not forgetting the arbitrage traders."

Both on-and-offshore gold traders at the SFTZ will bring a new wave of activity in the renminbi (RMB) market as they look at arbitrage opportunities against Comex gold and on spot platforms, coupled with managing the risk in naked yuan gold positions.

Forex Magnates expects currency and CFD brokers to see enhanced activity in the dollar RMB trading crosses.