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Brighter prospects for Chinese futures market
( 2004-01-05 00:50) (China Daily by Sun Min)

China's futures market is expected to welcome some new products and an improved regulatory environment this year.

Fuel oil, cotton and corn are the three products that are likely to be launched by the futures exchanges in Shanghai, Zhengzhou and Dalian respectively this year, according to Tian Yuan, chairman of the China Futures Association.

The exchanges had submitted relative proposals to the China Securities Regulatory Commission (CSRC) and is likely to get the green light soon, Tian said in an interview with China Daily.

That would be a major breakthrough for China's futures market, which is on the road to recovery after years of consolidation, and only had one new trading product over the past five years -- the high-quality strong-gluten wheat that was launched by the Zhengzhou Commodity Exchange last March.

"We hope that each of the three exchanges can develop at least one new product per year from now on. The pace should be faster in the future,'' said Tian.

Trading in fuel oil futures, for example, will have a symbolic meaning, paving the way for trade in more important oil products, such as crude, diesel and gasoline, which need futures to hedge the risks brought by price fluctuations in international markets.

Cotton and corn futures would have a similar impact.

But the launch of the long-awaited financial futures, such as bond futures and index futures, still does not have a timetable due to the authorities' risk concerns, said Tian.

The futures market is the only one of China's financial sectors that is excluded from the World Trade Organization (WTO) opening-up schedule.

But Tian said Chinese economy's increasing integration with the world market will lead to the eventual opening of the futures industry.

Moreover, the demand for a more developed futures market has been growing as the Chinese commodities prices get closely linked with the global market, and the Chinese economy becomes increasingly influential.

China's demand and supply of zinc, for example, is already an important factor determining the metal's price on the international market.

Current market supervision is a bit too tight, said Tian. But it will hopefully be relaxed.

"After years of rectification, China has greatly improved the futures regulatory system and drawn up more rules to curb wrongdoing,'' he said.

Tian, who is also the chairman and chief executive officer of China International Futures Co Ltd (CIFCO), the bellwether of the futures industry, expected a blossoming of the overall futures market in China this year, after the ups and downs of the past decade.

He said the State Council is likely to amend the provisional regulation on futures trading management, enacted in 1999, which erected many barriers, such as prohibiting futures brokerages from making investments for their own sake.

If the amendment is put on the government's agenda, then it would probably remove some of the restrictions and enable futures exchanges and brokerages to step up innovation and develop new products and services more quickly, said Tian.

Major global futures traders such as ADM Investor Services and Refco has set up offices in China to gather information and foster business ties with the intention of having a head start once the door opens.

Insiders say some foreign-invested yet China-incorporated companies, although not explicitly allowed, are already trading domestic futures contracts, with most of them trading copper contracts in Shanghai, either to hedge China-related price risks or to profit from price differences between domestic and overseas exchanges.

More, they say, are trading in overseas exchanges on behalf of domestic enterprises, both for hedging and arbitrage reasons.

Cross-border futures trade remains officially forbidden in China, except for a few big State-owned enterprises that were permitted to conduct overseas futures trading for risk-hedging purposes last year. Even these authorized enterprises, mostly companies trading metals and foodstuffs, can only trade products directly related to their business and are prohibited from speculating, according to sources with the CSRC.

However, Tian hoped that domestic futures companies could also enter overseas markets to help other companies that need to hedge their risks.

History of futures in China

China's futures market, set up in 1990, experienced a quick expansion until the mid-1990s, when loopholes in the regulatory scheme led to irregularities like fraud and strong speculation.

A host of scandals forced the authorities to start a clear-up of the market.

Many futures exchanges and brokerages were closed down and some products were suspended from trade.

The market was dormant from 1997 to 2002. Transaction volume, which totalled 10 trillion yuan (US$1.2 trillion) in 1996, declined to a low of 1.6 trillion yuan (US$192 billion) in 2000. It recovered to a record high of 11 trillion (US$1.3 billion) last year.

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