On January 19, 2009, the Industrial Bank became the first bank in China to offer deferred-delivery physical gold products from the Shanghai Gold Exchange (SGE) to personal bankers. Products will be available to personal bankers on a nationwide basis.
In order to implement the “Three Transformations” proposed for China's gold market by Mr. Zhou Xiaochuan (President of the People's Bank of China) and bring the investment and hedge effects of the gold market into full play, the People's Bank of China granted SGE permission to make deferred-delivery physical gold products available to personal bankers through commercial banks in November, 2007. Deferred-delivery physical gold products from SGE that are now available through the Industrial Bank include AU (T+D), AU (T+N1) and AU (T+N2). There is also a new variety AU9995 available. Deferred-delivery Physical gold products are listed trading contracts of SGE. The threshold required for trading is 1,000 grams, and trading is based on a bidirectional margin system. After a client opens a position for trading, he/she may choose to settle position/make delivery on the day in question or defer. After opening an account at a Bank outlet, investors can trade through the bank's online banking service or over the counter in Bank outlets. In order to reward investors for their loyalty to the Bank, all clients opening an account for the trading of individual gold investment products of SGE in the first six months of 2009 will be exempted from the account opening charge.
It is understood that the Industrial Bank has made specific upgrades to its gold trading platform to support the release of deferred-delivery physical gold products from the SGE. Both personal and institutional investors can use this platform to trade listed products of SGE.
According an official from the Industrial Bank, the rapid expansion of the international gold market and high gold prices in recent years have attracted a great deal of interest from Chinese investors. However, there has been a lack of suitable channels for making personal gold investments in China. In light of this, the Industrial Bank has capitalized on its status as an SGE bank member with full agency rights to become the first bank in China to offer the deferred-delivery physical gold products thereof to personal bankers. This service is available on a nationwide basis.
At the same time, the Bank also reminded investors of the leverage effects of deferred-delivery physical gold products from SGE. These products may bring investors high returns, but they can also result in huge losses, the sum of which may exceed the initial margin and variation margin. Moreover, investors may find it hard to grasp the direction of deferred charges and difficult to beat others in neutral position requisition, which will increase the cost of trading. Therefore, investors should seriously consider their risk tolerance and carefully research the characteristics and risks of products before investing in deferred-delivery physical gold products.
The Industrial Bank is the first commercial bank in China to make deferred-delivery physical gold products from the SGE available to personal bankers. This service is available on a nationwide basis. This move increases the number of options that domestic investors have when investing in gold, addresses growing demand for such services and will drive-on the development of China 's gold market. Moreover, the development of intermediary business such as gold business agency services will help Chinese commercial banks to break away from their traditional reliance on deposit and credit business, remain competitive in a fully opened-up financial sector and continue to record steady increases in yield.
Note 1: Deferred charges are the facility costs for funds or physical gold that are incurred due to deferred delivery by clients. The payment direction of such charges is determined based on the comparative volume of delivery requisition. If the volume of delivery requisitions is smaller than that of receiving requisitions, the short position should pay the deferred charge to the long position, and vice versa. If the volume of delivery requisition is equal to that of receiving requisition, no deferred charge will occur.
Note 2: Neutral position refers to a type of market participant who obtains gains from deferred charges by using funds (or physical gold) to meet the settlement demand arising out of differences in delivery requisition. If the result of delivery requisition is that the receiving volume is larger than the delivery volume, the neutral position should enter the market by delivering physical gold to collect payment and become long position at the settlement price of the day. In the event that delivery requisition results in the delivery volume being larger than the receiving volume, the neutral position should enter the market by making payments to buy in gold and become short position at the settlement price of the day.