Regions

Shanghai Gold Exchange allows gold, other securities as collateral trading

September 15
2:29 AM 2015

The Shanghai Gold Exchange (SGE) has allowed using physical gold and other securities as collateral on futures contracts trading. The move is aimed at increasing volumes and attracting investors from other markets.

The new facility is effective from 29 September onwards. In a bid to strengthen its position in the global gold trading, Shanghai Gold Exchange is evolving different products. The gold exchange is recently witnessing a rise in gold withdrawals.

As part of the latest decision, it'll allow certified gold bars as collateral to futures contract. The world's second largest economy aims at enhancing its pricing power in world gold markets by improving trading volumes. The Chinese government is also focusing on attracting foreign capital into the domestic financial markets.

In addition to gold, the gold exchange has also allowed other precious metals and securities. The list of allowed securities includes foreign exchange, silver, Yuan-denominated stocks, bonds and other securities as collateral.

Shanghai Gold Exchange is also keen on listing its contracts on global trading platform. Towards this, the Chinese gold exchange is discussing with CME Group Inc for mutual listing of contracts. China last year allowed trading of foreign investors in gold. 

The Shanghai Gold Exchange has also allowed A-shares, exchange-traded funds (ETFs),treasuries for using as collateral for gold trading. The Chinese government is taking all possible measures to infuse more money into crisis-hit stock markets. 

The counterparty and sovereign risks remain in an alarming situation, but not rising. In Asian nations like China and India, there's increasing perception about gold as a valuable asset with no counterparty risk. It's nothing but re-monetization of physical gold with usage into financial markets.  

The certified gold bars are allowed upto 80 percent value of margin value. Allowing physical gold is an attempt to boost trading volumes in Chinese financial markets, which fell 40 percent since June. With this decision, futures contracts Physical gold is no more seen as a mere commodity.

As part of its efforts to opening up of gold market, Shanghai Gold Exchange and Chinese Gold and Silver Exchange Society have recently launched an initiative called Shanghai-Hong Kong Connect. This enhances bilateral business volume in gold market between China and Hong Kong. 

Chinese government has also established an offshore settlement bank to integrate the onshore and offshore gold markets. The Gold Connect initiative is expected to enhance China's competitiveness in the global bullion market. 

On the other hand, the withdrawals on Shanghai Gold Exchange were higher following the market uncertainty. The exchange recorded 59.88 tons of gold withdraws in a week ended 28 August and it was 132.79 tons during last two weeks of the month. The two weeks withdrawals on Comex were 85 tons.

The withdrawals this year amounted to 1,718.20 tons. The withdrawals on Shanghai Gold Exchange were over 37 percent when compared with volume in 2014.

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