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Friday, April 27, 2012

Shanghai Futures exchange to offer contracts for silver

April 28, 2012 / D.Collins /

The China Money Report

The Shanghai Futures Exchange received regulatory approval on Wednesday to start trading in silver contracts, giving Chinese investors a new way to bet on the precious metal. The lot size of the contracts was set at 15 kilograms and the lot prices will be allowed to fluctuate by 5 percent a day. The margin requirement was set at 7 percent and prices will be
quoted in yuan. The minimum amount the prices will be allowed to fluctuate was set at 1 yuan (16 US cents).
Trade dollars were larger for a reason – they were designed to be exported to help expand trade with China, whose merchants wanted silver coins, not gold. The merchants in China might have accepted Trade dollars, but back in the United States a couple of years after they were first issued, no merchant wanted to accept them, at least as a dollar. That’s because they had their legal tender status revoked, making them the only coin in U.S. history that was circulating in significant numbers at less than face value.

The silver contracts are the first of their type to be offered in China.
Before, investors had to use Shanghai Gold Exchange Ag (T+D) contracts to
conduct certain transactions of the metal. They could also go to commercial
banks to buy paper silver, which don’t have to be delivered physically.
“There has been an absence of a means of trading in silver in China,” said
Wang Ruilei, an analyst with CGS Co Ltd, a precious metal trader. “The market
will be bigger and more liquid with the advent of these future contracts.”

The silver contracts will be only one in a series of futures contracts that
are to be introduced in what analysts described as a year of innovation for
the country’s futures market. Futures contracts for government bonds are
being tested and are expected to be formally introduced soon. New contracts
for crude oil, charcoal and glass are also being developed.

The introduction of silver futures comes after Chinese investors have shown
increasing interest in the metal amid surging inflation and the sluggish
performance of the stock and property markets – the darlings of Chinese investors.
In March, about 134 billion yuan in Ag (T+D) contracts were traded, more than
15 times the amount traded two years ago. Rather than gold, most retail investors
prefer silver because the minimum requirement for investing in it is much lower
in China.However, analysts say silver futures contracts will be more volatile
and thus less attractive to individual investors.Unlike Ag (T+D) contracts, the
futures contracts won’t be traded in night sessions that are synchronized with
global markets. Shorter trading times will exacerbate price fluctuations, which
can be dangerous to relatively uninformed individual investors, said Yang Yijun,
chief analyst with, a precious metal consultancy. In fact, the price
of silver has long been volatile. The global price of silver has more than doubled
since 2009. On one day last year, it plummeted by 13 percent.

The introduction of the silver futures contracts comes as good news for silver producers, which will now be better positioned to hedge their risks, analysts said. Silver producers have been selling more and more in the domestic market as the government repeatedly
lowers the export tax rebates it offers on silver. In the export market, producers have been able to hedge risks using Commodity Exchange Inc and the London Bullion Market Association but had no sound means of hedging in the domestic market.

The Ag (T+D) contract is not suitable for corporate hedging because it has no set
delivery date and charges a daily fee for unsettled contracts, which, in turn, pushes up trading costs. Source