* China wants to have bigger say in gold pricing
* Shanghai Gold Exchange talking to foreign banks, producers
on new int'l exchange
* Move comes as London daily gold "fix" under scrutiny
* New exchange plans physical contracts initially, then
By A. Ananthalakshmi
SINGAPORE, May 27 China has approached foreign
banks and gold producers to participate in a global gold
exchange in Shanghai, people familiar with the matter said, as
the world's top producer and importer of the metal seeks greater
influence over pricing.
The Shanghai Gold Exchange (SGE) got the go ahead from the
central bank last week to launch a global trading platform in
the city's pilot free trade zone, a move that could challenge
the dominance of New York and London in gold trade and pricing.
Beijing's plans to open up gold trading comes at a time when
the benchmark price-setting process for precious metals is under
scrutiny. Barclays Plc became the first bank to be
fined over attempted manipulation of the 95-year-old benchmark
London gold market daily "fix" last week.
State-backed SGE has asked bullion banks such as HSBC
, Australia and New Zealand Banking Group,
Standard Bank, Standard Chartered and Bank of
Nova Scotia to take part in the global trading
platform, two people approached by the exchange said.
SGE, the world's biggest physical gold exchange, where
domestic banks, miners and retailers buy and sell gold, could
also open up the international platform to foreign brokerages
and gold producers, they said.
"China wants to have more voice in gold prices," said Jiang
Shu, an analyst with Industrial Bank, one of 12 banks allowed to
import gold into China. "The international exchange is the first
step towards gaining a say in gold pricing."
"If you don't allow foreign players to participate in your
market actively, or do not push Chinese financial institutions
to participate in the international market, then China's strong
gold demand is only a number, not a power," he said.
HSBC and Standard Bank declined to comment, while the other
banks and SGE were not immediately available for comment.
The global platform will first host spot physical contracts
for gold and other precious metals, before aiming to launch
derivatives down the line, said a third source who is directly
involved in the launch of the international exchange.
"We are not just encouraging foreign banks but also
producers and other entities," added the source.
China, the world's biggest buyer of raw materials from
copper to coal, is pushing hard to establish pricing benchmarks
for a number of commodities.
Gold, along with oil, could be among the first to be opened
up to foreign players. The free trade zone in Shanghai is set to
see international energy trading by hosting the country's first
crude oil futures.
The Shanghai exchange is looking to launch three
yuan-denominated physical gold contracts, of 100 grams, 1 kg and
the bigger London good delivery bar weighing 12.5 kg, said
another source who has received a draft prospectus from SGE.
Contract specifications for silver, platinum and palladium
were also being discussed, though the sources said
specifications and participants had not yet been finalized. The
exchange is expected to be launched by the fourth quarter.
Even if China lures foreign players, the exchange would
still need to see full convertibility of the yuan and enough
liquidity on the exchange before it can be considered to operate
on a par with other hubs.
Currently, the London gold "fix" is the benchmark for spot
prices, while New York's COMEX contract sets the
futures' benchmark. SGE prices are tracked to gauge Chinese
demand as reflected in premiums or discounts to spot rates.
Earlier this year, China's ICBC - in conjunction
with its acquisition target Standard Bank - indicated interest
in buying Deutsche Bank's seat on the London gold fix but it is
not interested anymore, sources previously told Reuters.
While physical demand has always provided underlying support
to gold prices, speculative trade is what largely drives prices.
With China's push for an international physical exchange,
physical demand could begin to have a stronger influence.
China overtook India last year as the world's biggest gold
importer and gold jewellery and investment demand was up about a
third to a record 1,065.8 tonnes in 2013.
The influx of gold has made SGE the biggest physical
exchange, with a turnover of 10,000 tonnes for its immediate and
deferred delivery contracts, according to Thomson Reuters GFMS.
The Shanghai Futures Exchange has the world's second-most
traded gold futures contract, though trading is largely limited
to the domestic market with volumes of about 41,176 tonnes last
year, still well behind COMEX's 147,083 tonnes.
The SGE's international board and the main exchange could
eventually be merged when the yuan is fully convertible, Albert
Cheng, managing director of the World Gold Council's far east
"That would become a very important exchange in the world,
and Shanghai will truly become one of the three international
gold centres after New York and London," he said. "No doubt, the
participation in the international market is the key effort of
the SGE and the current administration."
(Editing by Ed Davies)