SINGAPORE (Reuters) - China will launch a gold exchange open to foreign players for the first time on Thursday, putting the world’s top bullion buyer on track to win a race to set the benchmark price in Asia.
The Shanghai Gold Exchange (SGE) will launch its international bourse with eleven yuan-denominated gold contracts, the first of a slew of bullion contracts expected in three other countries in the region before the end of the year.
A successful take-up could see more gold priced and paid for in yuan rather than the U.S. dollar, challenging the traditional dominance of London and New York in trading.
Asia, which accounts for about two thirds of global gold consumption, has long been clamoring to gain pricing power over bullion, although previous efforts have failed to win investor backing.
China’s efforts have the best chance of success, say market players, as it has a huge home market. With imports of over 1,000 tonnes of gold last year and local production of about 400 tonnes, China consumes over a third of global supply.
SGE’s global bourse, which will be situated in the new Shanghai free trade zone, is China’s biggest step toward being a price-discovery center by allowing foreign players to take part in the domestic market and by letting them trade in yuan.
“What we will see over time is the move toward pricing of gold and other commodities in offshore RMB,” said Jeremy East, global head of metals trading at Standard Chartered.
“This potentially has global implications, for instance any producer selling gold into China would be paid in RMB rather than in dollar, which has been the traditional pricing currency hitherto.”
The long-used pricing benchmark for gold, the so-called London “fix”, has come under regulatory scrutiny due to allegations of manipulation, adding to China’s push to have a bigger influence on global pricing.
“We should have gold fixing, pricing done in China itself,” SGE chairman Xu Luode told an industry conference in Singapore in June. “We need to build China’s influence in the global gold market.”
While physical demand provides underlying support for gold, prices are largely driven by speculative trade. China’s push for an international physical exchange means physical demand could have a stronger influence.
The contracts on the new exchange will be physically settled and will be traded between bullion banks, refiners, producers and trading houses.
Others centers are preparing similar contracts.
CME Group is set to launch a physically deliverable futures contract in Hong Kong later this year, while the Singapore Exchange will launch a wholesale contract. Dubai is also preparing to launch a spot contract.
The success of these contracts depends heavily on the liquidity they can garner, as that would indicate whether the prices would be widely accepted.
“China’s gold market advantage lies in the strength of its domestic market,” said Jiang Shu, an analyst with Industrial Bank, one of the few banks allowed to import gold into China.
A senior source at the SGE conceded that initial volumes may be light, but said the exchange was not worried about liquidity.
“We have confidence in the success of the exchange because we have genuine demand here,” said the source.
The exchange has attracted strong interest from foreign players, signing up more trading members than it had initially planned.
HSBC, Australia and New Zealand Banking Group, Standard Chartered, Goldman Sachs, and refiners Metalor and Heraeus are among initial trading members.
Trading in SGE’s gold contracts will kick off with a night session on Thursday, beginning at 8 pm local time 1200 GMT (8 a.m. EDT).
SGE set the price for the contracts at 245.28 yuan per gram for the first day, with a trading limit set at 6 percent of the price. From Friday, the trading band will be 30 percent, the exchange said on its website on Thursday.
Reporting by A. Ananthalakshmi; Editing by Richard Pullin