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Top bullion consumer China works on first gold forwards, options.

China, which overtook India last year to become the world's biggest consumer of gold, bans trading in commodity options and forwards at present to limit speculation

The Shanghai Gold Exchange, or SGE, is working on plans for China's first forwards and options in gold, sources say, potentially putting China ahead in the race to set an Asian pricing benchmark that might eventually rival the London gold fix.

China, which overtook India last year to become the world's biggest consumer of gold, bans trading in commodity options and forwards at present to limit speculation.

But Beijing is setting the stage for the launch of such derivatives as it opens up its markets, and gold could be among the first commodities on the list, although it remains unclear when trading might start.

The state-run SGE, at the forefront of China's efforts to dominate bullion pricing, opened an international bourse last month and foreign banks have shown strong interest in trading its yuan-denominated contracts. The exchange now wants to expand its product line to boost liquidity.

Higher volume in gold trades open to foreign players could help China set a benchmark for gold in Asia, at a time when the century-old London fix is under regulatory scrutiny and in the process of being revamped to provide more transparency. However, the SGE is likely to introduce gold options first on the main board for domestic players rather than on its new international board, according to two sources with knowledge of the plans. Foreigners are likely to see forwards first.

"We are eyeing the launch of gold forwards in the next six months to a year on the international board," said a senior source at the SGE, who declined to be named because the plans are not final. "Options are also in our pipeline but it may take longer and they are likely to be launched on the main board first, open to a few players."

Forwards and options can be used for hedging, but also for speculative trading. Options give the investor a right but not an obligation to buy or sell an underlying asset at a specified price by a certain date. They are considered more speculative than forwards, which set a price for physical delivery at a future date. "China wants to launch an options market and develop more derivatives instruments because they need to push for greater financial liberalisation," said Tan Xiaojun, a product analyst at Nanhua Futures.

"To do that, they will need to have bigger tolerance for speculative trade, but I think they are still very cautious on that end and the main consideration is still how much a certain derivative product can help end-users manage risks."

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Publication:Khaleej Times (Dubai, United Arab Emirates)
Geographic Code:9CHIN
Date:Oct 22, 2014
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