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Two decades of rapid economic growth have left the world’s biggest population consuming more food, energy and metals than it can produce, turning the country into a powerhouse importer.
Two decades of rapid economic growth have left the world’s biggest population consuming more food, energy and metals than it can produce, turning the country into a powerhouse importer.

China Plans Multiple Contracts With Foreign Investors

Internationalizing its futures market can boost China’s sway on global prices and help it eventually become a price-setter instead of a price-taker

China Plans Multiple Contracts With Foreign Investors

China buys more raw materials than any nation, but that doesn’t mean it always gets the best prices. So the government is altering domestic commodity exchanges to bring in more foreign investors and expand the country’s influence on global markets.
Two decades of rapid economic growth have left the world’s biggest population consuming more food, energy and metals than it can produce, turning the country into a powerhouse importer. Still, the value of many purchased commodities, from crude oil to soybeans, is set by global benchmarks priced in dollars on exchanges in other countries, where markets are more open, Bloomberg reported.
After years of building up locals-only markets for key products like grains in Dalian and metals in Shanghai, China wants to expand the kinds of investments permitted for foreigners. Exchange operators also plan to add futures contracts for key raw materials including hogs, apples, cotton yarn, pulp and urea fertilizer, as well as options on copper, corn and cotton. Despite bullish comments by officials, however, some question whether authorities have the appetite to truly open up.
“Internationalizing its futures market can boost China’s sway on global prices and help it eventually become a price-setter instead of a price-taker,” said Han Qian, associate professor of finance at Wang Yanan Institute for Studies in Economics at Xiamen University. “It not only fits into China’s strategy to promote global use of the yuan, but also frees domestic producers from foreign exchange risks.”
Domestic pricing of commodities has been aided by more than 1,000 venues for trading everything from donkeys to orchids. But those are typically small markets limited to transactions between local buyers and sellers.
The government considers making its markets more open, an important step in negotiating better deals on imports, especially after the economy expanded to become second largest in the world. China now imports more oil than the US and it’s the biggest buyer of all sorts of items, including iron ore, copper, soybeans, hay and pork. Total imports of raw materials were $366 billion in 2015, up from $116 billion a decade earlier, according to the World Bank.
Corn futures in Dalian have climbed 8.2% this year and traded at 1,643 yuan ($238) a ton on Friday. Iron ore has fallen 11% in 2017 to 489 yuan a ton.
In other parts of the world, futures exchanges are where producers and end users go to minimize price uncertainties, while speculators trade against short-term changes and arbitragers try to pounce on differences between contracts and the raw materials. The absence of foreigners and prevalence of speculators in Chinese markets mean they aren’t being widely used by the producers and users to hedge their risks.

Slow Progress
But progress on real changes has been slow because authorities tend to be risk-averse, said Jim Huang, chief executive officer at China-America Commodities Data Analytics Inc. and a former director at CME Group Inc. The China Securities Regulatory Commission has yet to approve any new futures contracts, and this year’s start of trading in options for soybean meal and sugar had been long delayed, he said.
“There is still a long way to go” before Chinese exchanges have pricing power outside the country, Huang said. Opening the market to foreign investors will be challenging because of China’s strict control over foreign exchange, he said.
Plans for commodity exchanges that could compete internationally were sidetracked by a market crash in 2015 that was followed by a price boom and bust last year. But amid a period of relative calm in China’s capital markets, with stock market volatility near historic lows after years of turmoil, authorities say they are back on track. Fang Xinghai, vice chairman of the CSRC, vowed in April to “proactively” push for changes that would lure more traders and investment.
The Shanghai Futures Exchange is studying a futures contract on paper pulp, while one of its affiliates is expected to start China’s first oil contracts, which would be open to offshore investors. China imported about 8.5 million barrels of oil a day in the first quarter, 4.3% more than the US, according to data compiled by Bloomberg.

 

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