September 15, 2014
By Gao Guohua
“The 3rd Plenary Session of the 18th CPC Central Committee first put forward the requirement of ‘enabling the market to bring off its decisive role in resources allocation’. The key to the efficiency of using the market in resources allocation is whether reasonable prices can be formed. In order to enhance the international competitiveness of China’s gold market and assist gold enterprises in realizing successful transformation and upgrading, the key is to enhance China’s influence on global gold prices,” said Yang Maijun, Chairman of Board of Directors of the Shanghai Futures Exchange (SHFE), at the 1st China Gold Congress jointly organized by the China Gold Association and the World Gold Council lately.
Since the gold market reform in 2002 and with the development of over 10 years, China has initially set up the multi-level gold market system including the gold spot market, the gold futures market, and the bank counter market. And as an important part of China’s gold market, China’s gold futures market has achieved relatively rapid development.
First, the market’s breadth and width have increasingly increased. With regard to the market’s breadth, the turnover of gold futures in 2013 was RMB10.71 trillion and that of silver futures was RMB23.11 trillion, both creating record highs. In the first eight months of this year, the gold futures has traded 28.738 million contracts (about 28,700 tons) calculated bilaterally and the accumulative trading volume is RMB7.44 trillion; the silver futures has traded 242 million contracts (about 3.629 million tons) and the accumulative trading volume is RMB15.29 trillion. With regard to the market’s depth, the position-holding amount of gold futures market has kept expanding in recent years and it remains about 200 tons at present while that of silver futures remains at about 8,500 tons.
Second, the investor structure is increasingly enriched. Domestic gold and silver manufacturing enterprises and consumption enterprises have become an important participation force in the market. At present, 17 banks have participated in the gold futures market. Up till now, the gold futures have 399 special unit customers (including futures company’s asset management, broker collective investment, and fund special accounts) and the silver futures have 503 special unit customers.
Third, the institutional innovation has achieved obvious results. In recent years, the SHFE has launched a series of institutional innovation. In particular, the launch of the Continuous Trading Program (or the Night Trading Session) has attracted wide attention and received the active participation from all market participants. Since the launch of the Continuous Trading Program at the end of 2013, the average daily trading volumes of gold and silver futures are respectively 269,900 contracts (about 269.86 tons) and 2.5751 million contracts (about 38,600 tons), which are 6.5 times and 9 times than those before the launching of the Continuous Trading Program (from their listing till July 4).
Fourth, the market functions have been well displayed. From the perspective of the price-finding function, the correlation coefficient of China’s gold futures prices and spot prices has maintained above 0.9 since the listing. With regard to the risk management function, the number of enterprises participating in hedging has increased in recent years, and the gold futures and silver futures have become an important tool for many precious metals enterprises and nonferrous metals enterprises in China to manage risks.
At the same time, the prices in China’s gold market have always followed those in foreign markets, and the content of Chinese factors is steel less. With regard to this, Yang Maijun said, “The futures cover a relatively wide scope in terms of trading amount, position-holding amount, and the number of participants. Moreover, the futures are more transparent and fair than trading in the over-the-counter market. As an organizer of China’s precious metals futures market, the SHFE will actively bring off the advantages of the futures market and promote Chinese factors’ right of speech in the global gold pricing.
Despite the rapid development of the gold futures market, Ye Chunhe, Vice President of the SHFE, has his own opinions. First, China’s gold industry is now at the critical period of transforming from the extensive development toward the refining development. Along with the rapid increase of gold enterprises’ level of using the futures market, relevant systems of the gold futures should also be innovated to meet the actual demands of enterprises. “According to the existing rules, only one delivery can be conducted every month for futures contracts, which cannot satisfy manufacturing and consumption enterprises’ operation demand of willing to purchase and sell at any time. Therefore, it needs exchanges to explore a new delivery system under the basis of existing system, in order to increase the delivery frequency and ensure that spot enterprises can both use the futures market to effectively conduct hedging and bring convenience to the purchase and sales.” Ye Chunhe said that from the perspective of enhancing the risk management efficiency and satisfying the different trading strategies, more deep-rooted derivatives like gold options should be launched as soon as possible.
Second, the gold futures market is in increasingly urgent need of transforming from the domestic market to the international market. In recent years, with the continuous expansion of the market scale, China’s gold futures market has received increasing high recognition from the international arena and many foreign institutional investors have attempted to seek channels to participate in China’s gold futures market. Opening up the futures market to foreign investors to make the domestic futures market part of the international futures market will not only help to enhance the Chinese factors’ influence in the futures price forming, getting rid of the situation that China gold prices are passively following the international prices, but also facilitate the construction of China’s international Financial Center from the long term.
Third, in terms of improving the external environment of the gold futures market, the SHFE is now actively cooperating with the administrative departments and relevant exchanges. Specifically, the SHFE has explored to set up the regulation and coordination mechanism with the Shanghai Gold Exchange, promoted the interactive regulation of the futures and spot markets, and strengthened the cross-market risk prevention capacity; it has closely cooperated with relevant regulatory departments to crack down on illegal gold and silver speculation and protect the legitimate rights and interests of investors; and it has also cooperated with the Ministry of Finance in improving the hedging-related accounting regulations to ensure successful hedging of enterprises in the futures market.
Yang Maijun said that, centering on the construction of gold futures market, the SHFE will firmly seize the opportunity of building the China (Shanghai) Pilot Free Trade Zone and facilitate the internationalization process of gold futures. It will strive to apply relevant policies in finance, tax, and customs it has received from Shanghai International Energy Exchange Corporation to the existing futures products and research to promote the opening-up of gold and silver futures; it will keep improving the Continuous Trading Program to realize the 24-hour trading as soon as possible and to connect with the international market; and it will also strengthen product innovation, further improve product series, and continue to enrich the product sequence of precious metals futures, so as to launch gold futures options as soon as possible and provide instruments to enrich investors’ trading strategies.
Source: Financial News
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