Gold traders yesterday hailed the China Banking Regulatory Commission's latest move to allow qualified domestic commercial banks to trade gold futures as an important step in boosting market liquidity at a time when the precious metal is becoming increasingly popular among investors.

The CBRC has released a circular specifying the terms and conditions under which commercial banks can trade gold futures on the Shanghai Futures Exchange. Only commercial banks that have already obtained licenses for trading financial derivatives and spot gold will qualify.

The move was particularly welcomed by domestic commercial banks offering a range of gold-linked wealth management products as they need to trade gold futures to hedge against risks resulting from gold price swings.

"With quite a number of gold-linked products in operation, many commercial banks have been calling for an effective tool to hedge against risks," said Cai Zhenwei, Bank of China's senior gold trader at the Shanghai Gold Exchange (SGE), which trades in physical gold. "Effective hedging is especially crucial for those commercial banks, like Bank of China, which buy and sell physical gold in large volumes every day."

Bank of China traded a total of 340 tons of gold on the SGE in 2007, accounting for 37 percent of the exchange's total, according to Cai.

Access to the gold futures market would encourage commercial banks to widen their gold product range, gold traders at commercial banks said.

"With a new hedging tool to work out a reliable rate of return, we'll have more freedom to design a greater variety of gold-linked wealth management products," said Cheng Xiangfeng, a senior gold trader at Industrial Bank.

Traders and analysts said the inclusion of commercial banks would greatly expand the depth of the gold futures market, helping to ensure that the futures prices will more accurately reflect the supply and demand conditions.

"Without the participation of commercial banks, it's difficult for the domestic gold futures market to reach a scale large enough to set reasonable prices," said Cheng.

Other commercial banks also need to prepare well before starting to trade gold futures.

"The risks involved in highly leveraged futures trading is obviously much higher than trading in the spot market," said Zhang Wei, deputy director for gold business at the financial market department of Bank of Shanghai.

"There will only be a small number of qualified commercial banks allowed to trade gold futures at the initial stage," Zhang said. "Other banks that have no previous experience in trading financial derivatives will have to first recruit qualified professionals and put in place the risk management systems that meet the requirements of the regulator."

(China Daily March 26, 2008)