China launches major push to help Shanghai Gold Exchange compete with LME for pricing power
NEW YORK (April 22) The People's Bank of China and three other government departments will invest in the internationalization of the Shanghai Gold Exchange – including warehouses for overseas delivery – setting the SGE up to compete with the London Metal Exchange (LME) for control over global pricing.
“The People's Bank of China and three other departments jointly issued the ‘Action Plan for Further Enhancing Cross-border Financial Service Facilitation in the Shanghai International Financial Center,’” Jinshi Data reported on April 21. “It mentioned enhancing the function of key financial platforms in allocating global resources. The plan includes high-level preparations for an international financial asset trading platform, aiming to create a significant functional platform for allocating global financial resources and facilitating international investors' deep participation in China's financial markets.”
“It supports the Shanghai Gold Exchange and other institutions in conducting product authorization cooperation with overseas exchanges, expanding the application of RMB benchmark prices in international mainstream markets,” the report stated. “The plan also explores the internationalization of specific product deliveries at the Shanghai Gold Exchange and the establishment of overseas delivery warehouses.”
The PBoC announcement did not specify which products would be the focus of the new initiative, but the Shanghai Gold Exchange primarily trades precious metals such as gold, silver, and platinum.
While China is the world's largest consumer of precious metals, most of the country’s trade continues to be benchmarked against international prices. But Beijing has been making moves to leverage its position in order to enhance the country’s pricing power and international influence in metals markets.
On October 14, Reuters reported that China is taking steps “to shape the pricing of the vast quantities of industrial metals it produces and consumes, with moves to attract foreign companies to trade on Shanghai's futures exchange, which would eventually fragment global markets.”
If the initiative succeeds, Shanghai's contracts would achieve benchmark status “and upend the system for reference prices of industrial metals in place since 1877,” when the LME was established.
Shanghai Futures Exchange benchmarks “would eliminate the need for Chinese firms to link their physical contracts to LME prices and create a need for foreigners to trade on ShFE to influence reference prices in their contracts, shifting market sway from the west to China,” the report noted.
Wang Fenghai, general manager at ShFE, told Chinese state media in June that the country must internationalize its markets if it wants to wield international influence on metals prices. "Only through opening up can we draw in foreign investors, participate in the process of ShFE’s price establishment, therefore enhance price influence,” he said.
Wang added that cross-border delivery capability was a key area of focus for ShFE, and the exchange was working to establish warehouses outside China to store metal for its contracts.
The effects of the ongoing gold price rally played out in dramatic fashion in Shanghai on Tuesday, with soaring gold prices triggering the ‘Doomsday Wheel’ effect in the options market.
“As of the morning close, several deeply out-of-the-money call options on the Shanghai Gold Futures at the Shanghai Futures Exchange saw their prices skyrocket,” according to a report from WallStreetCN. “Among them, the Shanghai Gold 2505 Call 888 had a maximum increase of 9800%, the Shanghai Gold 2505 Call 896 had a maximum increase of 7000%, and the Shanghai Gold 2505 Call 904 had a maximum increase of 5500%.”
Two factors appear to be driving the surge. “First, the aforementioned options are linked to the Shanghai Gold Futures, which surged in the morning session,” the report noted. “As of the morning close, the Shanghai Gold 2505 contract rose by 4.24%, marking the largest single-day increase since April.”
The second factor is the so-called ‘Doomsday Wheel’ effect, which has exacerbated the intraday volatility of the soon-expiring options. “According to the schedule, the expiration date for the Shanghai Gold 2505 options is April 24, with less than three trading days remaining,” they said.
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