China banks, regulators move to cool gold price rush

July 29, 2020

SHANGHAI (July 29) - Chinese regulators and major banks are rushing to curb precious metal trading by domestic investors to temper speculation that some fear could cause a repeat of this year's oil trading mishaps.

The scramble to limit risks comes as gold prices hit record highs this week, spurred by investors hunting for safe haven assets in markets rattled by worries of rising coronavirus cases, lofty equity valuations and a falling U.S. dollar.

A deepening rift between the United States and China has also become a factor drawing mainland investors to gold. Industrial and Commercial Bank of China (ICBC) , the country's biggest lender, said on Wednesday it would bar its clients from opening new trading positions for platinum, palladium and index products linked to precious metal from Friday.

That directive, according to the lender's customer service department, was in response to "violent price volatility" and "the need to control risks." Agricultural Bank of China said it had recently suspended new businesses related to gold, while Bank of China said it halted new account openings for platinum and palladium trading.

The Shanghai Gold Exchange said on Tuesday gold and silver holdings were high, and it would take risk-control measures if warranted to protect investors. The Shanghai Futures Exchange, where gold and silver futures contracts are traded, also urged its members to strengthen risk-management efforts and invest rationally.

"Gold remains a niche investment in China due to limited investment channels," said Frank Hao, an analyst at Hywin Wealth Management in Shanghai. "Investors mainly rely on purchasing paper gold products at commercial banks as a way to counteract risks."

Chinese investors are also actively trading gold ETFs, whose turnover has jumped in recent weeks. Huaan Gold ETF , Asia's biggest gold exchange-traded fund, has seen its assets under management soar more than 68% to over 11.8 billion yuan ($1.69 billion) since end-2019.

Regulators are mindful of risks after investors were caught off-guard in late April when Bank of China settled a crude oil futures trading product known as Yuan You Bao at minus $37.63 per barrel, following a historic slide in oil prices into negative territory.

The bank subsequently agreed to settle with more than half its customers facing losses, potentially taking a 6 billion to 7 billion yuan hit. Hao said any further gains in gold may spur more speculation, despite regulatory attempts to tamp it down.

"If the gold price rises past $2,000, some more hot money will certainly flow into the market, and some investors will divert their stock investments to gold," he said.


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