The Shanghai International Gold Exchange: A Comprehensive Overview

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The Shanghai International Gold Exchange (SGEI) was established by the Shanghai Gold Exchange (SGE) in September 2014, with the primary goal of creating a platform for the physical trading and safekeeping of gold, targeting international investors. This subsidiary of the SGE operates within the Shanghai Pilot Free Trade Zone (FTZ) and has its offices located in the Bank of China Tower at 200 Yincheng Road Central, Pudong, Shanghai.

  1. Shanghai International Gold Exchange (SGEI) Establishment: The SGEI, formed in 2014 as a subsidiary of the Shanghai Gold Exchange (SGE), is a dedicated platform for international gold investors, offering physical gold trading and custody services within the Shanghai Pilot Free Trade Zone.
  2. Physical Gold Contracts for International Investors: SGEI operates as the “International Board,” featuring various physically delivered gold contracts tailored for international investors. This distinguishes it from other gold markets where most trades are not backed by physical gold.
  3. Chinese Influence on Gold Pricing: SGEI plays a significant role in China’s efforts to influence global gold pricing. It introduced a yuan-denominated gold benchmark price to compete with the historic London gold fix.
  4. Gold Trading Products: SGEI offers three physical gold product contracts, denominated in Renminbi, providing international investors with options to trade gold, including ingots and bars.
  5. Certified Precious Metals Vault: SGEI operates a certified precious metals vault within the Shanghai FTZ, with a substantial storage capacity of 1,000 tonnes of gold. This vault ensures the secure storage and movement of physical gold, both for Exchange transactions and customer holdings.

Summary: The Shanghai International Gold Exchange (SGEI) was established in 2014 to facilitate physical gold trading for international investors within the Shanghai Pilot Free Trade Zone. SGEI offers various physically delivered gold contracts and plays a role in China’s influence on global gold pricing. It operates a certified precious metals vault with a substantial gold storage capacity of 1,000 tonnes to ensure the secure handling of physical gold for Exchange transactions and customer holdings.

From a trading perspective, the SGEI is commonly referred to as the “International Board” of the Exchange. On this platform, a variety of physical gold contracts designed specifically for international gold investors are listed and traded. These contracts are distinctive in that they involve the physical delivery of gold, and the SGEI maintains a certified precious metals vault within the Shanghai Pilot FTZ to safeguard the physical gold underpinning these transactions. It’s worth noting that this vault is separate from the SGE’s network of gold vaults, which primarily serves the domestic Chinese gold market. Gold stored in the SGEI vault can move in and out of the FTZ freely, as it is considered outside of China for customs purposes.

On a corporate level, the SGEI is responsible for international market development, the management of international members, and services catering to offshore investors. Although the SGEI and SGE are distinct entities, they both operate under the umbrella of ‘The Exchange,’ with the SGEI known as the International Board (IB) and the SGE as the Main Board (MB) of the Exchange.

Background.

In March 2008, the China Banking Regulatory Commission (CBRC) granted permissions to Chinese commercial banks, allowing them to engage in gold futures trading on the Shanghai Futures Exchange (SHFE). These banks are required to be members of both the SGE and the SHFE before participating in gold futures trading through the SHFE. The CBRC also stipulated that banks must maintain a capital adequacy ratio of over eight percent.

By May 2010, the exchange had expressed its intention to introduce gold exchange-traded funds (ETFs) in response to robust demand for gold in China. During the first quarter of 2011, gold demand in China more than doubled, surpassing India as the largest market for gold coins and bars.

Products and Services

On September 18, 2014, the Shanghai Gold Exchange launched a gold trading platform featuring eleven yuan-denominated gold contracts. This platform, known as the international board, operates within the city’s free-trade zone, making it accessible to foreign investors. These contracts involve the physical delivery of gold and are traded among bullion banks, refiners, producers, and trading houses.

Members of the Chinese Gold & Silver Exchange Society (CGSE) in Hong Kong began trading directly on the Shanghai Gold Exchange on July 10, 2015, broadening the avenues for accessing the Chinese bullion market. This move coincided with China’s plans to establish a yuan-denominated gold price fix, potentially giving Asian buyers greater influence in the bullion trade. The SGE aimed to launch a yuan-denominated gold fix by the end of 2015.

In April 2016, China announced the launch of a renminbi-denominated contract on the Shanghai Gold Exchange to set a benchmark price for gold bullion, further enhancing the country’s influence in gold pricing. This benchmark price was established at 257.97 yuan (US$39.83) per gram, with eighteen banks and bullion traders, including Chinese lenders and international entities like Standard Chartered Bank and Australia and New Zealand Banking Group, serving as initial market makers. This benchmark aimed to compete with the centuries-old London gold fix, which had transitioned to an electronic auction system.

Despite initial plans to introduce a two-way chase-settled platinum contract in 2019, these plans were delayed due to a lack of political clearance. Such a contract would have allowed car manufacturers in the world’s largest auto market to hedge their platinum usage in catalytic converters and offered investors a means to speculate on platinum prices.

Notably, on September 12, 2019, CME Group announced the launch of two new gold futures contracts based on the SGE Shanghai Gold Benchmark PM Price, with both contracts listed on the COMEX.

SGEI Gold Trading Products

The SGE’s International Board offers three physical gold product contracts, all denominated in Renminbi:

  1. iAu99.5: A 12.5 kg gold ingot with a minimum fineness of 99.5%.
  2. iAu99.99: A 1 kg gold ingot with a minimum fineness of 99.99%.
  3. iAu100g: A 100g gold bar with a minimum fineness of 99.99%.

These contracts can be traded using either onshore or offshore Renminbi, distinguishing the SGE from the London Over-the-Counter (OTC) gold market and the COMEX gold futures market. Unlike these markets, the Shanghai Gold Exchange facilitates physical gold trading, ensuring that the majority of trades represent actual ownership of gold.

Certified Vault of the International Board

In September 2014, the SGE unveiled a certified metals vault within the Shanghai FTZ, operated by the Bank of Communications. This vault serves as a physical storage facility for precious metals held by international members and their customers, providing physical delivery services for the Exchange in connection with physical bullion trading. It is important to distinguish between ‘Transaction Vaulting Services’ for the Exchange and ‘Safe Deposit Vaulting Services’ for customers, with the latter referring to the storage of bullion deposited by international members and customers, separate from the bullion used in physical trading.

According to China’s state TV network, CCTV, the SGEI certified vault boasts a storage capacity of 1,000 tonnes of gold. The Exchange has established specific rules and guidelines governing the storage and movement of physical gold in and out of the vault, as well as within the free trade zone area, addressing the import and export of gold to and from the FTZ.

  • The London OTC market, historically dominant in the gold trade, now accounts for approximately 70% of global notional trading volume. It sets the LBMA Gold Price, trading ‘Good Delivery’ bars stored in secure vaults, making it a key global benchmark. Known as the ‘terminal market,’ London’s strategic time zone and financial hub status contribute to its importance, despite a recent decline in relative market share. The introduction of LMEprecious by the World Gold Council aims to address these challenges and modernize the market.
  • In the US, the COMEX derivatives exchange, operated by CME Group, plays a vital role in gold price discovery. It focuses on the ‘active month’ contract, closely linked to the spot price. Though few contracts result in physical delivery, the COMEX remains connected to physical markets through an active Exchange for Physical (EFP) market. Notably, an increasing share of COMEX trading occurs during Asian market hours, reflecting its success in tapping into Asian market growth.
  • The Chinese gold market, primarily represented by the Shanghai Gold Exchange (SGE) and the Shanghai Futures Market (SHFE), has rapidly grown in importance. SGE, established in 2002, introduced the Shanghai Gold Price benchmark to assert China’s role as a price-setter, promote RMB internationalization, and encourage global participation. Active futures trading on SHFE complements SGE’s spot and deferred contracts, even though the two exchanges are not directly linked.
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