(Yicai) Feb. 13 -- China's hi-tech hub Shenzhen issued new rules today prohibiting companies from engaging in unlawful gold price-fixing, leveraged trading, deferred settlement deals and other unauthorized gold trading activities, in a move aimed to protect investors and ensure the stability of the local gold market.

Firms may not use online platforms such as WeChat groups, mini programs, apps or websites to let customers pay a deposit to lock in the price of a certain amount of gold under the guise of gold recycling or pre-priced gold sales, the Shenzhen Municipal Financial Regulatory Bureau said. In these arrangements, payments are later settled based on price differences as gold prices fluctuate, positions can be closed at will and no physical gold is actually delivered.

Such 'pre-priced' models have often operated under the name of physical gold trading, making them harder to identify from a regulatory standpoint. But with gold price volatility increasing recently, the risks have become more apparent and tighter oversight is now inevitable, industry analysts said.

Yicai previously reported in a series of exclusive stories that some precious metals firms on Shenzhen’s gujinshu platform were running 'quasi-futures' trading schemes under the banner of gold transactions. Investors only needed to pay a 2.4 percent deposit to participate in high-leverage transactions. Several gold pre-pricing platforms have recently encountered difficulties in redemption.

Companies must not engage in illegal fundraising by promising fixed returns or guaranteed principal under the names of gold custody, leasing or repurchase arrangements, the Shenzhen regulator said. Nor may firms carry out unlawful gold-entrusted investment activities, such as persuading consumers to buy physical gold but instead of delivering the goods, channeling the funds into gold investment schemes.

At the heart of the controversy is the fact that these businesses are illegally carrying out gold 'investment' activities with quasi-futures characteristics under the label of physical gold trading, blurring the line between financial and non-financial transactions and making them difficult to categorize.

The latest move by the Shenzhen regulator signals that authorities have now formed a clearer definition of these business models and have more comprehensively identified their illegal characteristics, industry insiders said.

Stricter oversight of precious metals raw material trading on the platform guijinshu is inevitable, Guo Lei, a lawyer at Jinzhou (Shenzhen) Law Firm, told Yicai. Future enforcement will focus on administrative regulatory measures, supplemented by criminal penalties.

Regulators are currently targeting two main types of activity, Guo said. One is pre-pricing businesses that resemble futures trading, and the other is financing schemes backed by gold, Guo said. Both carry strong financial characteristics. By contrast, spot trading, physical pre-orders with specified delivery dates, deferred settlement arrangements and trade-in models may still be allowed.

Editor: Kim Taylor