Reuters reported that China has proposed to expand trading of precious metals to its vast interbank market from designated exchanges in a bid to boost liquidity and help Beijing gain better pricing power amid growing appetite for commodities such as gold.

A person involved with the matter said that the Shanghai Gold Exchange has released draft rules for such interbank trading, which will include spot forward and swap contracts for precious metals.

According to the draft rules jointly developed by the SGE and the China Foreign Exchange Trading System a unit of China's central bank, Chinese authorities plan to launch the interbank trading on August 31st 2012. Currently, participants can only trade precious metals contracts on the SGE and the Shanghai Futures Exchange.

The authorities will introduce a market maker system for the planned precious metals trading with transactions done on an over the counter basis compared with the exchange based pricing mechanism. The move will make gold the first commodity to trade on the interbank market.

China has long kept a tight grip on its commodities market as financial institutions, end users and individuals cannot invest in commodity futures without special regulatory approval. The move was part of the broader financial reform that Beijing launched to grant market forces a bigger role in the markets.

Chinese regulators have said they would gradually open up the country's commodity exchanges to allow foreign investors to trade on its active copper, aluminum contracts. Plans for crude oil futures on the Shanghai Futures Exchange are completed and awaiting regulators' approval. The crude oil contract would become the second commodity futures after gold, to allow foreign investor participation.

Source - Reuters

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