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.
"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)