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Futures markets explore global benchmark
By Fu Chenghao |
June 29, 2012, Friday
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Print Edition
Print Edition
SHANGHAI is wasting no time in the campaign to propel its futures market into the modern financial era, aiming to create global price benchmarks for commodities from crude oil to copper to match China?s status as the largest raw materials consumer.
Domestic commodities futures trading is still largely off-limits to foreign investors, but changes are brewing, especially since Guo Shuqing took over as chairman of the China Securities Regulatory Commission last October.
Many market participants and analysts see Guo, the former chairman of China Construction Bank, as a steady reformer willing to push more openness in the futures markets as a means of bolstering the economy.
Reforms advanced last month when Wang Lihua, chairwoman of the Shanghai Futures Exchange, announced the bourse plans to launch crude oil contracts within the year and will allow foreign participation gradually in the trading of oil and other industrial metals already available on the exchange.
òThe launch of the crude futures is not only about the Shanghai Futures Exchange?s having a new contract, but it also symbolizes the opening-up of China?s commodities futures market,ó Wang said at the time.
òIt?s unavoidable that the futures market will get involved in global cooperation, competition and games,ó said Liu Zhichao, chairman of the China Futures Association. He added that he thinks development in China?s futures market has lagged behind what?s going on in the economy.
Chinese commodity exchanges had a down year in 2011.
The Shanghai Futures Exchange ranked 14th in a survey of global derivatives exchanges by number of contracts traded, according to the US Futures Industry Association. That was a drop from 11th place in 2010. The local bourse recorded a 50.4 percent decline in trading volume last year.
Plummeting activity, in particular in steel rebar and zinc, has been caused, in part, by rapid growth in the preceding years.
Wang said the exchange expects the new crude contact will make it one of the oil benchmarks in the Asia-Pacific time zone and will turn Shanghai into a global crude futures market.
A crude contract ? and hopefully a Shanghai price ? could be a major boost for Shanghai to compete with New York and London in the city?s effort to develop itself into a top financial center by 2020.
Tangible benefits
And there are some more tangible benefits in the near future. A Shanghai crude contract could help Chinese oil companies, still caught between fluctuating global crude rates and regulated domestic fuel prices, to better manage their refining businesses.
òThe oil producers will find a new channel to hedge their oil positions, and the spread between crude and refined products, and will be able reduce their foreign-exchange risk if the onshore oil futures market is settled in renminbi,ó said Liu Li-Gang, chief China economist at Australia & New Zealand Banking Group.
Wang said the contract will be priced in either yuan or US dollars, and delivery will occur at bonded warehouses. The Shanghai exchange in late 2010 started a trial to allow copper and aluminum delivery at such bonded warehouses in Shanghai?s free trade zones, where the metals are exempt from value-added tax and import duties.
Wang said the bourse is now studying how to make its delivery warehouses more international, but she didn?t elaborate. That was a signal that the exchange may set up offshore warehouses to boost its position globally. But it could also indicate that Shanghai may allow foreign participation in its own warehousing network.
Wang?s remarks are part of the òopen attitudeó from China?s commodities industry that has caught the attention of Liz Milan, managing director for Asia at the London Metal Exchange, the world?s largest metals marketplace.
The LME has renewed its drive for authorization to set up bonded storage sites in China, after its last attempt failed in 2008. At that time, China?s securities regulator said the nation?s rules were insufficiently developed for such a move.
According to Milan, the LME?s Chinese industrial customers said they would be interested in having an LME site here so that they can do physical arbitrage more efficiently.
The LME effort looks more plausible now, after the Hong Kong Exchanges and Clearing announced on June 15 a 1.39 billion pound (US$2.18 billion) bid for the London exchange.
The Hong Kong connection could help the LME expand in China and bolster the nation?s leverage over the pricing and warehousing of industrial metals crucial to manufacturing development, analysts said.
But shares of HKEx have tumbled since the bid announcement, on concerns the offer, at 180 times the LME?s 2011 net profit, is overpriced. The HKEx beat out its chief bidding rival, the US-based InternationalExchange Inc.
Increasing volume
Milan said that establishing offshore warehouses by both the Shanghai and London exchanges would pave the way for the creation of an arbitrage mechanism, which is expected to increase trade volumes on both exchanges.
òThis is a big opportunity, not a threat, for us as a market to develop in China along with the Shanghai Futures Exchange?s ongoing internationalization,ó Milan said.
Wang said copper prices on the Shanghai exchange already hold some sway over the copper price in London and a number of metals traded here have become regional reference points for spot-market trading.
Commodities traded on the Shanghai exchange include copper, aluminum, zinc, rubber, gold, silver, and steel wire rod and rebar. Wang said the exchange is looking to develop more futures for the steel sector, including iron ore, hot-rolled coil and steel plate. Among other future derivatives, the city is studying government bond futures, commodity price index futures and options.
Domestic commodities futures trading is still largely off-limits to foreign investors, but changes are brewing, especially since Guo Shuqing took over as chairman of the China Securities Regulatory Commission last October.
Many market participants and analysts see Guo, the former chairman of China Construction Bank, as a steady reformer willing to push more openness in the futures markets as a means of bolstering the economy.
Reforms advanced last month when Wang Lihua, chairwoman of the Shanghai Futures Exchange, announced the bourse plans to launch crude oil contracts within the year and will allow foreign participation gradually in the trading of oil and other industrial metals already available on the exchange.
òThe launch of the crude futures is not only about the Shanghai Futures Exchange?s having a new contract, but it also symbolizes the opening-up of China?s commodities futures market,ó Wang said at the time.
òIt?s unavoidable that the futures market will get involved in global cooperation, competition and games,ó said Liu Zhichao, chairman of the China Futures Association. He added that he thinks development in China?s futures market has lagged behind what?s going on in the economy.
Chinese commodity exchanges had a down year in 2011.
The Shanghai Futures Exchange ranked 14th in a survey of global derivatives exchanges by number of contracts traded, according to the US Futures Industry Association. That was a drop from 11th place in 2010. The local bourse recorded a 50.4 percent decline in trading volume last year.
Plummeting activity, in particular in steel rebar and zinc, has been caused, in part, by rapid growth in the preceding years.
Wang said the exchange expects the new crude contact will make it one of the oil benchmarks in the Asia-Pacific time zone and will turn Shanghai into a global crude futures market.
A crude contract ? and hopefully a Shanghai price ? could be a major boost for Shanghai to compete with New York and London in the city?s effort to develop itself into a top financial center by 2020.
Tangible benefits
And there are some more tangible benefits in the near future. A Shanghai crude contract could help Chinese oil companies, still caught between fluctuating global crude rates and regulated domestic fuel prices, to better manage their refining businesses.
òThe oil producers will find a new channel to hedge their oil positions, and the spread between crude and refined products, and will be able reduce their foreign-exchange risk if the onshore oil futures market is settled in renminbi,ó said Liu Li-Gang, chief China economist at Australia & New Zealand Banking Group.
Wang said the contract will be priced in either yuan or US dollars, and delivery will occur at bonded warehouses. The Shanghai exchange in late 2010 started a trial to allow copper and aluminum delivery at such bonded warehouses in Shanghai?s free trade zones, where the metals are exempt from value-added tax and import duties.
Wang said the bourse is now studying how to make its delivery warehouses more international, but she didn?t elaborate. That was a signal that the exchange may set up offshore warehouses to boost its position globally. But it could also indicate that Shanghai may allow foreign participation in its own warehousing network.
Wang?s remarks are part of the òopen attitudeó from China?s commodities industry that has caught the attention of Liz Milan, managing director for Asia at the London Metal Exchange, the world?s largest metals marketplace.
The LME has renewed its drive for authorization to set up bonded storage sites in China, after its last attempt failed in 2008. At that time, China?s securities regulator said the nation?s rules were insufficiently developed for such a move.
According to Milan, the LME?s Chinese industrial customers said they would be interested in having an LME site here so that they can do physical arbitrage more efficiently.
The LME effort looks more plausible now, after the Hong Kong Exchanges and Clearing announced on June 15 a 1.39 billion pound (US$2.18 billion) bid for the London exchange.
The Hong Kong connection could help the LME expand in China and bolster the nation?s leverage over the pricing and warehousing of industrial metals crucial to manufacturing development, analysts said.
But shares of HKEx have tumbled since the bid announcement, on concerns the offer, at 180 times the LME?s 2011 net profit, is overpriced. The HKEx beat out its chief bidding rival, the US-based InternationalExchange Inc.
Increasing volume
Milan said that establishing offshore warehouses by both the Shanghai and London exchanges would pave the way for the creation of an arbitrage mechanism, which is expected to increase trade volumes on both exchanges.
òThis is a big opportunity, not a threat, for us as a market to develop in China along with the Shanghai Futures Exchange?s ongoing internationalization,ó Milan said.
Wang said copper prices on the Shanghai exchange already hold some sway over the copper price in London and a number of metals traded here have become regional reference points for spot-market trading.
Commodities traded on the Shanghai exchange include copper, aluminum, zinc, rubber, gold, silver, and steel wire rod and rebar. Wang said the exchange is looking to develop more futures for the steel sector, including iron ore, hot-rolled coil and steel plate. Among other future derivatives, the city is studying government bond futures, commodity price index futures and options.
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