CME Group: The Global Footprint of the Chinese Gold Market
CME Group announced that it will list new gold futures contracts based on the Shanghai Gold Exchange’s Benchmark PM assessment. Subject to regulatory review, the Exchange will list both U.S. dollar and Renminbi denominated contracts in Q4 2019.
China is the world’s largest gold producer, accounting for 11.5% of global production of the precious metal (404.1 MT in 2018)1. The country is the largest user of gold for jewellery fabrication, accounting for 30.6% of global demand. consumption was 686.5 MT in 2018, a 3% increase versus 2017. China is also a pivotal country for physical investment demand in gold. In 2018, Chinese investors purchased 308.0 MT, or 28.6% of total global physical gold buying. The official sector, acting through the People’s Bank of China, is another large buyer active in the market. It has accumulated official reserves of 1,853 MT at the end of 2018. However, government purchases are small compared to total jewellery and physical investment (10 MT purchased in 2018). To satisfy aggregate demand, China relies more and more on imports from the rest of the world:
Chart 1: Mainland China official gold bullion imports
The Chinese gold price generally follows international prices as determined in COMEX Gold Futures trading and in the London bullion market, but it is also affected by local supply and demand factors. Typically, Chinese prices will be quoted at a premium to attract product to the country as China is a net importer. It is normally prohibited to export gold from China.
Alongside New York and London, Shanghai has grown into the third largest gold trading hub in the world. The Shanghai Gold Exchange (SGE) was launched by the People’s Bank of China in 2002, with the goal of becoming the central hub for all Chinese gold trading activities. It is now the world’s largest physical gold exchange, and the near totality of imported gold, domestically mined gold and recycled material is traded through this marketplace. SGE offers trading in different qualities and delivery units for both spot and forward delivery. Physical delivery occurs via a network of more than 50 vaults across the country.
Chart 2: Average daily volume on the SGE (million ounces)
Prior to 2016, the Chinese marketplace lacked one unique and widely recognizable benchmark price. This led to the introduction of the Shanghai Gold Benchmark price. The benchmark price is determined twice daily via electronic auctions, at 10:15 (AM session) and at 14:15 (PM session) China time. It is reflecting the value of gold with a standard weight of 1 kg, a minimum fineness of 999.9 purity and delivered in SGE certified vaults, denominated in RMB per gram.
Since launch, volumes auctioned in the SGE Gold benchmark have grown meaningfully and now amount to an average monthly volume of approximately 50,000 kg 2.
Chart 3: Auctioned volumes on the SGE benchmark price
By offering gold futures contracts that settle against the SGE benchmark price, CME Group will offer exposure to the largest physical gold market to its global customer base. The Shanghai Gold futures contracts will connect the Chinese marketplace to the deepest liquidity pool for gold futures trading on COMEX. Participants with physical exposure to the gold price in China will be able to hedge their exposure in the familiar CME Group regulatory environment without any restrictions. The new contracts are a crucial link between the largest physical market and the global marketplace for futures trading in gold. They will be available both in Renminbi and in U.S. dollars, thereby giving participants all necessary tools to manage their Chinese gold price exposure and to capture trading opportunities in global gold markets.
1. Source: Metals Focus, Gold Focus 2019
2. SGE data tracks both buys and sells. Therefore, published volume figures were halved to report in “round turns” and avoid double counting.