China Business
New China options to pave way for open commodities
trading
Regulator approval comes after surge in volumes and volatility in 2016
JANUARY 6, 2017by: Lucy Hornby in Dalian
As China prepares to introduce its first options contracts for commodities
trading, the head of one of the country’s leading bourses for raw materials has
shrugged off fears that the move will add to the extreme volatility in
commodities seen in 2016.
“We [in China] are behind international markets because we have too few tools,
too few products,” says Li Zhengqiang, chairman of the Dalian Commodity
Exchange, adding that introducing more products and new instruments like
options will help hedge risk, not add to it.
Regulators approved the launch of the country’s first commodities options last
month, giving the nod to Dalian to launch soya meal contracts later this year,
The approvals come after a year of record volumes in Chinese commodities
futures trading. Explosive gains
(http://next.ft.com/content/ac21eaca-110b-11e6-839f-2922947098f0) in Chinese steel and coal contracts in 2016 took
international markets by surprise and lifted prices globally. The boom in futures
trading alarmed regulators, who feared a repeat of the stock market turmoil
(http://next.ft.com/content/bd29517c-c6bf-11e6-8f29-9445cac8966f)
experienced the year before.
In 2016, the Dalian exchange saw trading volumes jump almost 50 per cent
from a year earlier to Rmb61.4tn, a threefold increase from 2010. Trading
volumes on China’s three exchanges reached a combined record of Rmb177tn
last year.
Mr Li, who wants the DCE to become one of the international centres for
commodities pricing and risk management, says there is a growing consensus
among Chinese officials of the need to embrace new financial products. China
launched options on an equity index in 2015.
In an interview in the northeastern port of Dalian, he said: “Society used to
worry about new products, and officials did as well. Now they basically don’t
have doubts any more.”
Introducing options is first of the exchange’s “three big strategic missions”, he
says, along with allowing foreign investors to trade directly in Chinese futures,
and introducing swaps contracts.
Options — which give the right but not the obligation to buy a financial contract
in the future — would allow greater hedging flexibility for Chinese corporations;
swaps would allow producers and consumers greater protection against
commodity price volatility.
Both products have boosted volumes and profits for exchanges worldwide, but
China’s conservative regulators had worried they would introduce even more
“We are behind international markets because we have too few tools, too few
products. And another disadvantage: at the moment, we are still a relatively
closed market,” he says.
Foreigners can set up a China-registered company to trade Chinese futures, but
the process is cumbersome. Mr Li wants overseas investors to directly trade
Dalian’s iron ore contract and possibly its palm oil contract. Regulators have yet
to sign off.
While China is the leading buyer of
most resources, including soyabeans,
iron ore and oil, its futures markets are
at a nascent stage, and Beijing is still
feeling its way out of the state planning
era. Only three years ago, it declared in
policy reforms that markets should
play a “decisive” role in allocating
resources.
Mr Li is pulling for China’s transformation into an international financial centre
equal to its economic heft. International traders already pay attention to China’s
commodities exchanges — Dalian and the country’s two other commodities
exchanges in Shanghai and Zhengzhou — which for several years have set the
direction of international markets for metals and grains.
But he understands the need for caution. “For China to launch any new tool, any
reform, it needs a suitable environment. And what does that mean? It needs the
market to be relatively stable.”
Mr Li believes China’s three exchanges will someday rival the LME or CME as
global players. But for now, they must balance their mission to increase trading
volumes with averting a socially destabilising crash, he says. “Our responsibility
is to keep the market stable. The burden on us to dampen market risk is
greater.”
Additional reporting by Archie Zhang
Twitter: @HornbyLucy (https://twitter.com/HornbyLucy?ref_src=twsrc%
5Egoogle%7Ctwcamp%5Eserp%7Ctwgr%5Eauthor)
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