It should come as no surprise that China, the world’s largest gold producer and buyer should want to become a major gold trading center. The Wall Street Journal has reported such plans after being briefed by an insider.

China has proposed to broaden trading of precious metals in its local market in order to help China become a “major gold trading centre” (see News).

The Wall Street Journal was briefed about China’s plans by “a person involved with the matter.” The paper reports that “the move could increase liquidity and help Beijing gain stronger pricing power for key commodities like gold”.

China is the largest consumer and now the largest producer of gold in the world and has aspirations to become a major gold trading center on a par with London and New York. China is also the fifth largest holder of gold reserves in the world after the U.S., Germany, France, Italy (see table).

Clearly they have ambitions far beyond a major Gold trading center but as a worlds reserve currency, possibly even THE worlds reserve currency.

Chinese officials have spoken of China’s aspirations to have gold reserves as large as the U.S. in order to help position the yuan or renminbi as a global reserve currency. Indeed, it would be only natural for China to aspire to have their currency become the global reserve currency in the long term.

In the longer term, being a major gold trading center would make China a more powerful financial and economic player and indeed could allow them to influence commodity and other important market prices. Indeed, Reuters reported that becoming a major gold trading center “would boost the country’s clout in setting global prices”.

The journal reports that “Beijing’s tight grip on commodities trading and rigid capital controls are among the obstacles in the way.”

The move is also part of the broader financial reforms that Beijing has launched in recent weeks, loosening some of the restrictions on securities investment and allowing banks to price loans at cheaper rates than in the past, that seek to grant market forces a bigger role in both the economy and the capital market.

The moved proposed by market officials would expand trading of precious metals from designated exchanges to the country’s vast interbank market, according to the person involved. The Shanghai Gold Exchange has released draft rules for such interbank precious metals trading, which will include spot, forward and swap contracts for the commodities, said the person.

Current limitations.

At the moment, producers, consumers and investors can trade only spot and futures contracts in gold and silver on the Shanghai Gold Exchange and the Shanghai Futures Exchange, respectively.

Due to limited membership on the two exchanges, many investors, including banks, aren’t able to directly trade the precious metals on the exchanges.

The draft rules were jointly developed by the Shanghai Gold Exchange, which is the world’s biggest marketplace for spot gold trading, and the China Foreign Exchange Trading System, a central bank subsidiary that oversees onshore currency trading.

Plans are afoot to get around this and expand gold trading.

According to the draft rules, the authorities are aiming to launch the interbank trading on Aug. 31, starting with gold contracts, said the person.

That would make gold the first commodity to trade on the interbank market.

The authorities will introduce a “market maker” system for the planned precious metals trading—the first time the system will be used to trade a commodity on the interbank market—with transactions done on an over-the-counter basis as compared to the exchange-based pricing mechanism.

Market makers are firms that stand ready to buy and sell a product at a publicly quoted price to facilitate trade.

An over-the-counter market would allow investors, in this case banks, to trade in large quantities that far exceed the Shanghai Gold Exchange’s current trading volumes, analysts said.

According to the draft rules, banks are allowed to use the new precious metals contracts in the interbank market for proprietary trading only.

The Shanghai Gold Exchange is inviting banks, mostly members of the exchange, to submit applications to take part in the trading, said the person, who expects most major and midsize banks to participate.

The move to let banks become market makers also shows the authorities’ desire to give such better-established and more sophisticated institutions more power in setting prices for major commodities, a common practice in developed markets, said Jiang Shu, senior precious metals analyst at Industrial Bank Co.

Current restrictions and capital controls remain an obstacle to China becoming major gold trading center and to the renminbi becoming an accepted global reserve currency.

The move by China to expand precious metals trading to their glowingly important and vast interbank market is important and another step towards China becoming an economic power on the world stage and one that will rival European nations and the U.S.

Source: Goldcore

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