Established rivals may keep Shanghai trade zone's gold exchange in check
China is the world's biggest user of the precious metal but establishing a world-leading market will likely need a heavy investment in time
China's launch of an international gold exchange in the Shanghai Free-Trade Zone 11 days ahead of schedule last week, may not be much help as it seeks to compete with established gold markets such as New York, London or Singapore.
While China is the largest physical gold consumer in the world, the financial infrastructure may lag that of Singapore and Hong Kong in handling a gold market.
Gold traders believe the gold market in the FTZ would attract domestic and foreign investors to trade, but catching up with the major international players will not come quickly.
"There would be a lot of demand for gold trading in the new market,' said Andrew Fung, executive director of Hang Seng Bank, with traders keenly interested in arbitrage opportunities between Hong Kong and Shanghai to make money.
"But it would take a long time for Shanghai to catch with other international big players such as New York, London or Singapore as these markets are long established. In addition, the yuan is not yet fully convertible which makes it hard for the Shanghai gold market to become international. It may, however, be able to fight for a role in Asia," Fung said.
Ben Kwong Man-bun, a director of KGI Asia, said the Shanghai international gold exchange would attract mainland and international investors.
"The gold board is supported by the central government in China and this is the first international exchange in the Shanghai Free-Trade Zone. With support from the government, many big mainland companies will trade in the new market, while international investors will also tap this opportunity," Kwong said.
"However, it won't be a successful international market in the near term as it will take time to build up volume. It needs time to catch up with other markets."
Singapore used to be a leading centre for handling gold in the region given its ability to serve both the Chinese and Indian markets. The city state's position in Southeast Asia was eroded when Dubai emerged and took the Indian business away from Singapore owing to its proximity to India.
Hong Kong's experience also shows it is not easy to launch a gold exchange.
The ill-fated Hong Kong Mercantile Exchange (HKMEx) suspended trading in May last year after operating for two years, hounded by a lack of volume in its gold and silver contracts. Its founder Barry Cheung Chun-yuen is facing bankruptcy orders applied by his creditors and former employees.
The High Court in April ordered HKMEx to be wound up after it failed to repay four creditors rent and salaries totalling nearly HK$100 million.
A gold contract in Hong Kong Exchanges and Clearing has also been plagued by light or no volume since last year.
The most actively exchange-traded gold contracts are on the 103-year-old Chinese Gold & Silver Exchange Society. Many of its end users are jewellery manufacturers or retailers such as Chow Tai Fook or Chow Sang Sang. Its president Haywood Cheung Tak-hay believes the Shanghai exchange would give fresh opportunities for the local gold bourse.
"We are in discussions to establish an alliance with the Shanghai Gold Exchange in a bid to achieve cross-border gold trading between Hong Kong and the new international gold market in the Shanghai Free Trade zone," he said.
The gold contracts traded on the international gold board are denominated in yuan and overseas investors can settle with offshore yuan funds. This is because the international gold exchange is located in the FTZ where the Chinese government has approved more flexible use of the yuan in the area. The new market will also allow gold imported from overseas to be warehoused in the FTZ and used for physical delivery of the metal.
The international gold exchange was launched one year after the zone was set up. It had been scheduled to launch on September 29 but was brought forward to Thursday last week, a move some industry players said was due in part to the visit of Premier Li Keqiang to the area.
Helen Wong, deputy chairman of HSBC (China) said the international gold board opened China's gold market to global investors, underscoring the Shanghai FTZ's role in bridging onshore and offshore markets, while pricing in yuan would further enhance the currency's use in cross-border investment.