China expects much from gold futures trading in Shanghai

New Tool Expected to Spark a Gold Rush

By Wang Lan
China Daily, Beijing
Wednesday, January 9, 2008

http://www.chinadaily.com.cn/bizchina/2008-01/09/content_6381941.htm

After months of planning, China will get its first precious metal futures product when trading in gold futures begins in Shanghai today.

Gold futures contracts are expected to provide a much-needed hedging tool to help boost trading in the Shanghai gold market, which is rapidly gaining influence in setting global prices.

Analysts said trading in gold futures contracts also offers an alternative investment opportunity to savvy investors and producers in a culture that traditionally values gold as a symbol of wealth and prosperity.

A one-week gold futures trial began on January 2.

The contract size of gold futures was increased to 1,000 grams per hand from the original 300 grams in the draft contract released early in September. Based on the current spot price of gold at 200 yuan ($27.51) per gram, the value of each contract is around 200,000 yuan.

As the margin requirement for trading is set at 7 percent of the contract value, the threshold for access to the gold futures market is around 14,000 yuan.

Analysts said the higher threshold is designed to discourage individual investors who lack adequate financial capabilities to cope with the potential risks involved in gold futures trading. In addition, the adjusted contract size, which is in line with international standards, could help facilitate trading and delivery of the yellow metal when it is made possible in the future.

Industry analysts said gold futures trading in China would have huge growth potential at a time when the country is still lacking diversified financial tools.

"Investors in China have a more urgent need for gold futures than investors in other countries, where derivative products other than gold futures contracts, including interest rate futures and foreign currency futures, are provided for investors as hedging tools," said Chen Jinhua, deputy general manager of Jingyi Gold Investment Co.

"I believe the trading volume of the proposed gold futures will, in time, surpass the combined volume of all commodity futures on the domestic market," Chen said.

Li Jingyuan, an analyst at Shanghai-based Haitong Futures Co., agreed. "Gold futures contracts are expected to be traded more actively than any other existing contract in China," he said. "There is a fast increasing demand for trading gold futures from investors."

Analysts said investors consider gold more a financial instrument than a metal because it is popularly used as a tool to hedge against inflation and economic uncertainties.

As gold prices always go contrary to other asset price trends, buying gold is also a good way to preserve capital value when the stock market is bearish or the US dollar is weakening.

"It is necessary for both hedgers and speculators to include gold in their investment portfolio to help balance the wide price swings of stocks or properties," Li of Haitong said.

With the stock market expected to cool this year, investment funds are likely to be diverted from shares to gold futures, analysts said.

"Compared to other complicated derivative tools, gold futures are an efficient and easy-to-handle tool to hedge against inflation," said Chen at Jingyi Gold.

"The lower costs of margin trading in futures contracts will also attract a large number of participants and help increase the liquidity of the market in the future."

Although China was the second biggest country in terms of gold output in 2007, the gold price has remained largely under the influence of international markets like London and New York. For a long time, many gold processors in China were faced with the risks posed by price fluctuations. Trading in gold futures is expected to protect downstream companies from exposure to such risks.

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