Related readings:  Gold prices down on strong US dollar, decreased demand  Gold consumption continues to surge in China  China to open gold market wider  PTA futures launched in Zhengzhou

"Trading will be approved sometime next year if negotiations between the two sides proceed smoothly," a source said. But it could be somewhat "indirect" in the early stages, he added, without elaborating.

The city's bourse operator, Hong Kong Exchanges and Clearing, confirmed holding talks with the Shanghai exchange regulator, but declined to give details.

The Shanghai Futures Exchange and the Shanghai Gold Exchange were not available for comment.

The Chinese Gold and Silver Exchange Society in Hong Kong has spent HK$15 million (US$1.9 million) to set up a 24-hour electronic gold trading system that will be launched in six months.

The system will provide one-stop services, including buying and selling of gold futures, said Michael Ling, managing director of Upbest Precious Metals (Asia), which is a member of the society.

"We were told that we would be able to deal in gold futures contracts from the mainland after the system is operational," he said.

A vault will be built at Hong Kong airport to store the gold to be transported between the mainland and the special administrative region (SAR). The vault is expected to open in the second half of next year.

"With all facilities in place, mainland gold futures trading in Hong Kong is just a matter of time," Ling said.

The futures sector is one of the few the mainland did not make any promises of opening during its entry into the World Trade Organization in 2001.

At present, overseas investors are not allowed to buy or sell mainland futures, although some industrial insiders have said a number of them had been involved in the trade through "underground" channels.

On the institutional front, foreign brokers can now hold a stake in their mainland peers.

The deregulation could signal a gradual but significant opening up in futures trading, Ling said.

The mainland gold futures trading could also be the first step in the SAR's goal to re-launch commodity futures transactions, which was stopped in 1999.

Hong Kong SAR Chief Executive Donald Tsang said in his annual policy address in October that the SAR government would conduct an in-depth study into re-starting the commodity futures market.

Hong Kong used to have a prosperous goods futures market in the 1970s, but the rise of the financial market in the 1980s and 1990s made equity indices the only products that could be traded in its futures market.

However, following the rapid growth of the mainland's economy, Hong Kong now feels the need to resume the business, especially because the SAR has long served as a bridge between the mainland and international markets.

The resumption of such trading will serve as fresh proof of the growing exposure of Hong Kong's economy to the mainland. The latter is now Hong Kong's largest export destination and the biggest source of its listed companies.

"Without the mainland, trading commodity futures in Hong Kong would be awkward because its service-led economy has little demand for raw materials," Phillip Capital Management (HK) fund manager Ricky Cheung said. "Most Hong Kong manufacturers are now on the mainland."

Choosing gold as the first step is a wise move, Cheung said. "Hong Kong's jewellery industry is booming and has a big demand for gold."

Softbank Investment's Ronald Wan said such trading would help feed the strong demand for local businesses to hedge risks.

After gold, oil futures could be next, some experts said, although that would be much harder to realize because Hong Kong does not have enough manufacturers operating in the territory.

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