Volatility sparks interest in futures

Updated: 2011-08-19 10:36

By Liu Yiyu (China Daily)

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BEIJING - Chinese investors have showed growing interest in futures products over the past year amid volatile commodity prices.

"We've seen significant growth in trading volume originating from Chinese investors and hedgers during the past nine months," said Thomas Farley, president of ICE Futures US, a subsidiary of Intercontinental Exchange Inc (ICE).

ICE operates leading regulated exchanges, trading platforms and clearinghouses serving global markets for agricultural commodities such as cotton and sugar, currencies, emissions, energy and equity index markets.

ICE Futures is also the provider of the world's crude oil benchmark - Brent crude oil futures.

"The number of investors from China at least doubled (starting in) the third quarter of last year," said Farley.

With China's increasing demand for more imported cotton and sugar, which have seen extremely volatile prices over the past year, investors have started to look at futures to hedge risks.

Cotton prices, which surged to historic highs this spring, have plunged by almost 50 percent from their peak. Sugar prices hit a 30-year high at the beginning of this year and have fluctuated widely since then. China is the world's biggest sugar and cotton consumer.

Currency basket

ICE is also the world's only provider of US Dollar Index futures, which measure the value of the US dollar relative to a basket of foreign currencies. Investors express their view on the dollar through long or short positions.

"The downgrade of the US government is an over-reported story," said Farley.

He said that market reaction has proven that investors remain confident about the US government's creditworthiness, with the yield on the 10-year Treasury note, a benchmark for everything from home mortgages to car loans, having declined.

"US dollar assets are by far the safest foreign investment and China will continue buying those assets although there is an expectation that China will seek to diversify over time.

"A diversification is necessary if the US pursues QE3," he said, referring to a possible third round of quantitative easing.

On Aug 6, Standard & Poor's downgraded the US AAA long-term credit rating for the first time by one level to AA+, triggering concerns about the security of China's foreign assets.

China has the world's largest foreign exchange reserves at about $3.2 trillion.

"The country has a clear desire to move off a direct peg to the US dollar, in order not to rely too much on the US," said Farley, who visited China to explain the pricing of the dollar index futures contract and how currency baskets function.

"State agencies and State-owned enterprises have all shown an interest" in the contract and its construction, he said.