Golden Opportunity for Banks in China: New Rules Issued to Allow Commercial Banks to Trade Gold Futures

On January 9 2008 the first gold futures product was launched on the Shanghai Futures Exchange. On March 24 2008 the China Banking Regulatory Commission (CBRC) issued a new circular entitled Circular of CBRC General Office on Certain Issues relating to Commercial Banks Engaging in Domestic Gold Futures Business (CBRC Circular). This new regulation was warmly welcomed by not only commercial banks, but also by futures trading groups and the Shanghai Futures Exchange.

Why is the CBRC Circular so significant? This is the first time since the promulgation of the Regulations on the Administration of Futures Transactions by the State Council in March 2007 that commercial banks in China have been allowed to engage in a specific type of commodities futures transaction. Previously, commercial banks were only permitted by law to engage in certain financial futures transactions (mostly relating to currency and interest rates), but not commodities futures transactions. This demonstrates that Chinese regulatory bodies are gradually (albeit slowly) opening the door to commercial banks for commodities futures transactions.

Historically, commercial banks in China have been barred from engaging in commodities futures transactions (save for certain financial derivatives trades, mostly offshore) on the basis of regulatory, and risk, considerations. Later, a few Chinese commercial banks became members of the Shanghai Gold Exchange (the only gold exchange in China which trades spot gold). However, the activities they were permitted to conduct were all spot gold related, such as participating in the trading of spot gold (acting as liquidity provider), providing related financial services including gold custody, gold pledge (mortgage), gold lease, gold agency, as well as acting as a counterparty in gold buying and selling by individual investors (at present, individuals in China cannot directly buy or sell spot gold on the Shanghai Gold Exchange. They have to trade with a bank who is a member of the exchange).