A L C H E M I S T I S S U E S I X T Y T H R E E

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The Shanghai Gold Exchange andits future development By WANG Zhe, Chairman and President of the Shanghai Gold Exchange

At the 2004 LBMA Conference

in Shanghai, Central Bank

Governor Zhou Xiaochuan

proposed a ‘three

transformations’ strategy,

which led the way for the

development of the Chinese

domestic gold market. It is an

honour that six years later the

LBMA has decided to return to

Shanghai to host such a

high-profile forum.

Since then, the Shanghai Gold Exchange

(SGE) has embarked on a fast-paced

development. Today, I am here to give you

an introduction to the services of the

Exchange and share our experiences. I will

give a brief history of the development of the

Exchange over the past six years, and

mention some ideas about its future

development.

History of the SGEThe Exchange was officially opened

on 30 October 2002. It currently has

163 members, including major domestic

commercial banks, five foreign banks,

and firms involved in gold production,

consumption and investment. It has

nearly seven thousand institutional clients

and over two million individual clients.

The Exchange has twelve types of contract in

gold, silver and platinum. It undertakes

other business including spot physical,

deferred trading, forwards and individual

physical investment.

Since 2004, the Exchange has continued

to develop. Its trading volume has increased

at a rate of about 40% per year, increasing

even more quickly in 2008 and further in

2010. In that year, trading volumes of gold

and silver reached new records: 6,051 tonnes

of gold at a value of RMB 1,615.78 billion,

73,615 tonnes of silver at a value of RMB

386.33 billion and 54.69 tonnes of platinum

at a value of RMB 19.84 billion. In 2011,

the market maintained rapid growth and the

variety of silver contracts grew at an

explosive rate.

By the end of April this year, the

Exchange had traded 1,909 tonnes of gold,

73,569 tonnes of silver and 20.88 tonnes of

platinum, a total transaction value of more

than RMB 1 trillion.

From the opening of the Exchange in

2002 to the end of April this year, more

than 20,000 tonnes of gold, nearly 170,000

tonnes of silver and 300 tonnes of platinum

were traded. The total transaction value

exceeded RMB 5 trillion.

Market featuresThe Exchange can be described in terms of

the following six major features.

Spot transactions and physical demand

The Exchange focuses on serving the spot

market to meet the domestic market’s

requirement for large amounts of physical

bullion. China has rapidly become the world's

largest gold consumption market. In 2010,

gold spot transactions grew 28% to reach

1,626 tonnes and the amount of physical gold

delivery at the Exchange reached 837 tonnes,

a new record, which guaranteed the leading

position of the Exchange in the domestic

gold spot market.

Deferred trading and derivatives

One of the important points of the ‘three

transformations’ strategy is the transformation

of the domestic gold market from a

commodity market to a financial derivatives

market. The Exchange strives to explore new

products as well as strengthen its spot

market. In 2004, the Exchange launched a

gold deferred trading product, which became

extremely popular. The turnover of gold

deferred trading grew 36% to reach 4,423

tonnes in 2010. Gold deferred trading has

accounted for over 60% of the gold market

for three consecutive years. In 2010, it

accounted for 73% of the market. In addition

to gold, silver deferred trading has grown

rapidly during the last three years. In 2010,

silver deferred trading accounted for more

than 96% of the total trading volume of

The following is an edited

version of a keynote speech

made at the LBMA Bullion

Market Forum in Shanghai

on 26 May 2011.

Chairman Wang Zhe (far right) at the LBMA Bullion Market Forum - Shanghai 2011.

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73,615 tonnes. All silver trading in the first

four months of this year was deferred

trading. As you can see, deferred trading

contracts have become core products of

the Exchange.

Price discovery and

synchronisation

With the gradual maturity of

the price discovery function

and pricing mechanism, the

Exchange’s gold price has

dominated the domestic

market. Now that five

further commercial

banks have been

awarded physical gold

import and export

licences, commercial

banks import a

substantial amount of

gold. The Exchange

plays a critical role in

minimising the price

difference between the

domestic and overseas

markets. Although the

dramatic moves in the

international gold price

last year led to a surge in

domestic demand, which

pushed up the domestic gold

price and widened the price

difference, overall the domestic price

now moves in synchrony with the

international price. The price difference

between the two markets has shown a clear

seasonal pattern. In the peak season leading

up to Chinese New Year, from November to

January, the price difference between the

two markets could be as wide as two to

three yuan per gram. However, from April

to August the difference was narrower,

within one yuan per gram.

Members of the Exchange

Drawing on the experience of the

international market, the Exchange has

supported its financial members (commercial

banks), benefiting from their abundant

financial resources and strength. Bank

members' proprietary trading grew 29% in

2010 to reach 2,094 tonnes and client

trading grew 56% to reach 277 tonnes.

Currently, the commercial banks account

for 58% of the market and more growth

is anticipated.

Apart from banks, general members also

play an important part in the market. In

2010, their proprietary gold trading grew

12% to reach 1,171 tonnes and clients’ gold

trading reached 1,356 tonnes, a slight

decrease from the previous year. Proprietary

silver trading grew 104% to reach 1,562

tonnes; clients’ silver trading grew 83% to

reach 19,876 tonnes. Though the institutional

clients are still the most important

participants in the market, the market share

of individual investors has soared in recent

years. In 2010, individual gold trading

volume reached 1,154 tonnes, an

increase of 163%. The number of

individual investors increased

93% to 1,778,500. The share

of individual gold trading

increased from 9% to 19%.

The amount of individual

silver transactions reached

49,738 tonnes, more

than ten times as much

as in 2009. During the

first four months of this

year, the number of

individual investors kept

growing rapidly and

now has exceeded two

million. The Exchange

has become the main

channel of investment of

physical precious metals,

fulfilling the needs of

domestic residents.

Night trading session

The SGE was the first to offer

a night trading session in the

domestic financial market. The

night session starts at 9pm and ends at

2.30am the next morning (Monday to

Thursday). It overlaps with the afternoon

session in London and the morning session in

New York, which is beneficial for the

synchronisation of markets and enables

domestic investors to arbitrage across

markets. Since the official launch in

November 2005, the night session’s trading

volume has increased every year, particularly

in 2008 when trading volume quadrupled

compared to the previous year, accounting

for one-third of total trading volume. In

2010, night session total gold turnover rose

24% to reach 1,943 tonnes, accounting for

32% of the total gold trading volume.

37,553 tonnes of silver were traded, an

increase of 352%, accounting for 51% of

total silver trading volume. The Exchange is

now considering the launch of a Friday night

session to fulfil market needs.

Foreign members

Over the past two years, the Exchange has

admitted HSBC, Standard Chartered Bank,

the Bank of Nova Scotia-ScotiaMocatta,

Australia and New Zealand Bank and Credit

Suisse as members. The SGE is the first and

only exchange in China with foreign

membership. Not long ago, applications from

Barclays Bank and United Overseas Bank

were approved. Very soon they will become

members of the Exchange as well. Besides

that, many well known international

commercial banks, including JP Morgan

Chase, Deutsche Bank, Standard Bank and

UBS have shown an interest or are applying

to become foreign members of the Exchange.

Foreign members of the Exchange play an

increasingly important role in the market.

From September last year, foreign banks’

proprietary trading grew rapidly. In 2010,

the transaction volume of foreign member

banks was 168 tonnes, almost 5 times of the

previous year, accounting for 8% of the total

proprietary trading.

The next stepThe gratifying development of the gold

market presents both opportunities and

challenges. It is worthwhile to think about

how we can take advantage of the

opportunities to innovate and sustain the

growth of the market, while seeking

co-operation with international markets for

mutual benefit. We would like to propose

the following ideas.

Further improvements in the

Exchange’s inter-bank price

quoting system

The Exchange formally launched the price

quoting system in March, allowing

commercial banks to cover paper gold

exposure and fulfil the specific needs of OTC

forwards. The Exchange combines the trading

models of price bid and price quote to

nurture and support the domestic gold

market makers and to attract more investors

into the market to satisfy their multi-

dimensional trading needs. In the future, as

the price quoting system is developed and

perfected, we are confident that we are

forging a useful tool for the bidding market.

We have also realised that, compared to

the wide variety of personalised products in

the international gold market, such as spot,

forward and swaps, our current price quoting

system provides limited products and services,

which are mainly focused on physical

transactions and limited gold lending services.

Therefore we need to further improve the

price quoting system, enrich the variety

of products, enhance their functions and

gradually adopt international trading products,

to meet the banks’ individual needs.

Establish the gold lending market and

form the lending rate.

The lending market is an integral part of the

international gold market system. In a mature

gold market, participants can lend gold and

finance at the market lending rate, in order

to carry out market transactions more easily.

In the domestic market, due to the late start,

The lending market is

an integral part of the

international gold market

system. In a mature gold

market, participants

can lend gold and finance

at the market lending rate,

in order to carry out

market transactions

more easily.

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the scale of the gold lending market is still

relatively small, while a market lending rate

has not yet been established. However, in

recent years, with the support of the

Exchange, the domestic gold lending market

has made great progress. Market players have

gradually become more diverse. Foreign

banks, domestic commercial banks and

enterprises are actively involved. In 2010, the

total commercial bank gold lending grew

68% to reach 112 tonnes. The potential of

the lending market is very promising.

Hence, the Exchange should take the

opportunity and accelerate the establishment

of the gold lending market. It should support

more commercial banks to provide gold

lending services, attract foreign banks and

refinery companies to join, and facilitate the

mobility of domestic physical gold. What is

more important is to establish a gold lending

rate in China as soon as possible, to

encourage inter-bank gold lending and assist

small and medium enterprises, thus to

improve market functions.

Build a gold derivatives market.

The first domestic gold ETF - Lion Global

Gold Fund was launched at the end of last

year, which has gained much attention at the

Exchange. On the one hand, we intend to

further reduce the trading hurdle and

the investment threshold of

existing products in response to

the impact of fund companies’

ETF products on the market

system; on the other hand,

we have accelerated the

steps to study gold

bonds and ETF products

as an important reserve

to explore new

products and promote

innovation.

Admit more

influential

international

banks and gold

dealers as members

The gold market is a

global market.

However, our gold

market is not very

internationalised. In

recent years, we have

introduced some influential

foreign banks and

endeavoured to communicate

with foreign markets. But this is

just the beginning. Next we will

continue to increase the number of foreign

members and introduce more powerful

foreign financial institutions and gold dealers

into our market.

Meanwhile, we will further improve our

quality of service and provide foreign

members with better market environment to

stimulate their enthusiasm. The Exchange will

communicate and co-ordinate with PBOC

actively to address the concerns of foreign

members, particularly the foreign exchange

allowance and issues of importing and

exporting. The Exchange will encourage our

foreign members to play a greater role.

Connect the domestic physical

certification system with international

markets.

There is a comprehensive physical

certification system in the London gold

market, which is a globally recognised

physical delivery criterion and plays an

important role in the promotion of globe

gold trading. At present, although China's

gold quality certification system has met the

standard of the LBMA in both specifications

and standards, and some rules are even

stricter than those of the LBMA, there is no

common admissible mechanism of

international certification which can apply to

domestic physical gold. This has handicapped

the development of domestic market. This fact

made us realise that we should co-operate

with the LBMA to connect the two physical

certification systems as soon as possible, so

that gold in China can be accepted in the

international market and we can

supply gold more efficiently to

gold market players both at

home and abroad.

Increase communication

between the two

markets and make

regular visits.

The London gold market

has a history of over a

century. Despite the

fact that the London

bullion market uses an

OTC model which is

totally different from

the Exchange’s model,

there are still a lot of

valuable experiences we

can learn from the

London gold market in

areas of market

management, product

innovation, risk control,

physical delivery, warehousing

and logistics. During the last

two years, I have been to

London twice to study the specific

subject of the tax system, OTC price

quote model, and lending market at the

London gold market. And I have learned a

lot. Facing the rapid development of the

market, I feel it is necessary to set up a

regular visiting mechanism between these two

markets to understand new developments and

market information relevant to each other.

Now, we are in a special historical time

full of opportunities. In the future, the

Exchange will further its marketing

innovation, enrich the variety of trading

models used and promote improved

functioning of the market. We will enhance

our core competitiveness and increase our

influence in the international gold market.

Wang ZheChairman &President,Shanghai GoldExchange

Mr. Wang Zhe, is

a member of the

CPC and was born

in August, 1960. He has an MBA degree.

He started his career in July, 1984 and

currently serves as the Chairman and

President of Shanghai Gold Exchange. He

spent four years studying at Jilin Trade &

Commerce College before starting his

career at the Currency Issue Division and

General Office of the People’s Bank of

China from July, 1984. After that, he

served as the General Manager of China

Gold Coin Corp. (Shen Zhen) Company

from December, 1991 to March 1995.

From March 1995 to April 1999, he served

as the Deputy Governor of CITIC Bank

(Shen Zhen) Branch, Chairman of Da

Peng Securities Co., Ltd. and Deputy

General Manager of China Gold Coin

Corp. From November 2001 to February

2011, he served as the Deputy Chairman

and President of Shanghai Gold

Exchange. And from February 2011, he

became the Chairman. Mr. Wang Zhe is a

well-known expert in the country’s

precious metals industry with rich

experience in not only the precious metals

market, but the banking and securities

sector as well.

Now, we are in a

special historical time

full of opportunities.

In the future, the Exchange

will further its marketing

innovation, enrich the

variety of trading models

used and promote

improved functioning

of the market.