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Futures markets strive for stable future in China
When the first national qualification test for futures professionals was held in early 2000, only around 9,000 people nation-wide took it.
At that time, the futures market was still struggling to clean up its bad reputation associated with the debacle of bonds futures in 1995. For years, the market was known for rampant speculation and manipulation, a market without future.
But after China's entry into the World Trade Organization (WTO) in late 2001, China's futures markets dramatically changed. The government, industry, media and local enterprises are working to get the volatile price movement under control. Even the public is beginning to look positively at this market.
China's futures markets are now in their prime, with a market turnover increase in 2003, when there was a new record of 1.08 billion yuan (US$130.4 million), compared with the previous record of 1.005 billion yuan (US$121.37 million) in 1995.
This leads some to believe the worst is over and the markets are striding to make best old records.
If the trading volume is the only indicator of China's prosperity, analyzers would be mislead into thinking the markets are already among one of the most successful in the world.
In fact, it is no surprise that people cite the fast growing trading volume so often, because there is little else to cheer about.
A critical look at the markets beyond the dazzling volume record reveals it has not improved much from a couple of years ago.
The futures regulatory regime in China is roughly the same as before. The task of regulating the markets is primarily in the hands of China Securities Regulatory Commission, the watchdog of financial and futures industries, and the three futures exchanges.
In reality, more of regulatory function has to be carried out by the exchanges, because it knows the operation of market players and is in the best position to forestall any manipulator's attempt to disrupt the normal market order.
And just as before, the Chinese people have to rely on the wisdom and diligence of the regulators to dissolve the potential crisis in several futures contracts through the year of 2003.
Unfortunately, the diligence of the market regulators could not replace the roles of sound markets rules.
In the United States, the futures exchanges are for profit organizations and the members are also the owner of the exchanges. They would not allow any manipulators because it would damage the integrity of the markets, which is important to keep investors. The result of low liquidity of the markets means lower income for the exchanges.
Such mechanisms mean the exchanges in the US would not be shortsighted to pursue the high trading volume without paying due attention to the principles of the markets.
"If the traffic in Beijing is good and every driver obeys the rules, then people would feel safe and more would be on the streets. Futures markets are similar in providing a safe place for the investors to trade," said David D. Lehman, the managing director of Product Development, Chicago Board of Trade, in late 2003 in Beijing.
He stressed that the key target of the futures exchanges is not striving for high trading volume but to provide a sound platform for investors for price discovery and risk management.
Many investors in desperate need of risk management are still not allowed to trade futures.
Rules and regulations still forbid the State-owned enterprises to trade in futures markets. Legal barriers prevent Chinese futures brokerage companies to provide brokerage service to overseas clients.
Only a handful of licensed local companies are allowed in the foreign futures markets.
In the five months following September 2003, the crude oil futures prices in NYMEX have soared to nearly US$36 a barrel, a sharp increase from the low of US$25 a barrel.
This translates a huge cost increase for the major airliners such as Southern Airline, as one third of its operational cost are spent on fuels. But Southern Airline has not been approved for trading crude oil contracts, like other large airliners.
More embarrassingly, even if China were to allow crude oil futures trading tomorrow, it would not likely attract heavy weight players like Southern Airline, not to mention Sinopec, because the total size of Chinese futures markets are still too small for these ventures.
As of the end of 2003, the customer's total margin in the futures markets is estimated at less than 15 billion yuan (US$1.79 billion), not even a fraction of stock markets's capital, according to industry officials.
In one way or another, China's futures markets are still in their infancy.
The limited resources, in particular the scarcity of institutional and commercial players, could seriously cap the growth potential of futures markets, as the primary goal is to serve processors, producers and distributing firms.
Interest in trading volumes record is understandable, but obsession with them is dangerous.
There is little to cheer because China's futures markets are basically a narrow-banded commodity markets, leaving out energy, electricity, and even agricultural commodities such as corn, cotton and sugar.
It is still far from certain when China could embrace the birth of financial derivative futures such as stock index, bond, currency futures.
The futures markets have no boundaries.
On February 8, Eurex US, the American arm of the world's largest futures exchange, opened for business in Chicago, starting its quest to grab lucrative US Treasury derivatives business from the Chicago Board of Trade.
The pride about record trading volume could blind us to miss the opportunity of building our markets in a way that could compete with the immense global competition.
The urgent task of the markets is not to celebrate, but to focus on a regulatory system, a more balanced and diversified futures contract family and the focus of providing quality service for commercial investors.