With world bullion prices hitting new
highs, gold futures made a strong debut on the Shanghai Futures
Exchange (SFE) on Wednesday. The contract offers China a chance to
become a key player in the global gold market. It could also be a
hedging tool for gold producers and a means to absorb excess
liquidity, analysts said.
The key contract for June delivery was the first to take off,
surging 9.98 percent to 230.95 yuan (about 31.65 U.S. dollars) per
gram. This was followed by the daily limit rise of other contracts
for July-to-December delivery.
Seven contracts were traded, with the benchmark price set at
209.99 yuan per gram by the SFE a day earlier, lower than world
prices.
The contract size was set at 1,000 grams, larger than the
originally expected 300 grams, to discourage individual investors
who lacked the ability to handle the risk.
Analysts said they believed investors would need at least 24,000
yuan to secure a futures contract, as most futures brokers would
ask for a 12 percent cash deposit for each contract.
The most active June contract closed the first trading day at
223.3 yuan per gram, up 6.34 percent, with a turnover of 23.2
billion yuan, according to the SFE website. The total turnover of
the seven contracts was registered at more than 27 billion yuan for
the day.
All futures contracts finished the day higher, between 223 yuan
and 228 yuan, slipping slightly after peaking at 230.99 yuan.
China launched gold futures trading as international gold prices
have repeatedly hit new highs. Global prices jumped more than 30
percent last year, the biggest increase since 1979.
Gold prices climbed more than 2 percent on Tuesday against
strong oil prices and a weakening U.S. currency. A troy ounce of
gold for February delivery added 18.3 U.S. dollars to settle at
880.30 U.S. dollars on the New York Mercantile Exchange
(NYMEX).
Last month, the China Securities Regulatory Commission (CSRC)
approved the launch of gold futures trading. It was the fifth new
futures product approved last year after zinc, rapeseed oil,
polyethylene and palm oil.
The SFE, one of China's major futures trading venues, previously
traded copper, aluminum, zinc, natural rubber and fuel futures.
Some analysts said that gold futures could provide experience
for the long-awaited launch of stock index futures.
Live pig futures will also be launched to help stabilize pork
prices.
Hedging prices VS investment tools
Shang Fulin, CSRC chairman, stressed the financial nature of the
precious metal and called for "joint efforts for the stable
operation" of the new product at the launching ceremony in
Shanghai.
He said gold futures would improve the country's domestic gold
market and pricing mechanism and provide options for financial
institutions, gold producers and consumers to protect against
market risk. It would also further develop the nascent futures
industry.
"Most new futures investors would be institutions seeking a
hedging tool," said Zhang Yingying, a Galaxy Futures Broker gold
analyst. So far, however, the SFE has listed only four members for
futures trading, all of which are large Chinese gold producers.
She said, "the contract size could limit participation by
individual investors, but in the long run both institutions and
individuals would play an equal role."
Zhao Yuanlin, a Guotai Jun'an Futures analyst, said the
brokerage had received numerous inquiries about gold futures from
individual stock investors recently. The China Securities
Journal also reported people lining up outside futures brokers
to open accounts in eastern Zhejiang Province.
However, "I would first offer risk education to veteran stock
investors, since even they lacked the experience for riskier
futures trading," Zhao told Xinhua.
Chinese investors, who saw the key stock index nearly double
last year, have shown strong enthusiasm for the new investment
product. However, the regulators were trying to discourage such
clients, fearing that some might take on risks they couldn't
handle.
The SFE said earlier that it would impose strict risk controls
on gold futures. It would also set a minimum margin requirement of
7 percent of the contract value. And, as noted, the increase in the
contract size -- from 300 grams to 1,000 grams -- was another
attempt to limit individuals' participation.
Meanwhile, CSRC said individuals would be barred from taking
physical delivery of gold in futures trading and could buy bullion
only from banks or the spot market.
Rising star in world market?
"The trading volume of Chinese futures would likely expand
quickly and could soon rank top among global exchanges, even
outstripping NYMEX in the long run," a senior official at the
exchange told Xinhua's International Herald Leader
reporter.
Zheng Xueqin, a Chicago Board Options Exchange senior counselor,
agreed that "Shanghai could emerge as the third center of world
gold trade, after New York and London."
He said, "the SFE would first become a center for Asian trade,
given the country's large reserves and consumption and the
traditional Chinese love of gold." Hong Kong and Tokyo were two
major Asian trading centers.
Domestic analysts expressed confidence about the contract's
prospects, citing robust investment registered in simulated trade
between Jan. 2-8.
China was the world's third largest gold producer in 2006 after
South Africa and the United States. Gold consumption by the
country's manufacturing sector was about 9.2 percent of the global
total, according to official data.
Sun Zhaoxue, China Gold Association head, said on Wednesday that
the country's gold output reached 270 tons in 2007, only 20 tons
short of South Africa, the world's largest producer.
Liquidity absorber
"Gold futures could also provide a reservoir to absorb the
country's excess liquidity, a major concern of the government amid
the anticipated strong appreciation of the currency, which had
already pushed asset prices up," said Zheng Runxiang, a senior gold
investment analyst. He said that the new futures market could thus
help the country's tighter monetary policy and alleviate inflation
pressure.
Trade at the Shanghai Gold Exchange, the country's spot market,
was 1,828 tons last year, with a total value of 316.5 billion yuan.
Based on that figure, Zheng said, the futures market could hit 10.5
trillion yuan, because international experience showed that futures
trade was usually 33 times spot trade.
The estimated figure would exceed the combined market
capitalization of the country's two stock markets in Shanghai and
Shenzhen.
(Xinhua News Agency January 10, 2008)
