Shanghai exchange set for oil futures

PUBLISHED : Tuesday, 29 May, 2012, 12:00am
UPDATED : Tuesday, 29 May, 2012, 12:00am

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The Shanghai Futures Exchange plans to launch China's first crude-oil futures contracts this year, inviting foreign investors to participate in Beijing's latest attempt to burnish its global economic clout.

Wang Lihua, chairman of the exchange, told a forum yesterday that the bourse had completed drafting the legal and technical framework for oil futures. That brings it closer to starting trading of a benchmark contract during Asia-Pacific trading hours, a move regulators describe as a quintessential part of the global oil market.

It is the first time China's regulators have announced the timing of the trading debut of the long-heralded contracts, part of stepped-up efforts by Beijing to ensure the nation's energy security.

'The Shanghai Futures Exchange views oil futures as an important step that reflects China's efforts to open up and liberalise its futures market,' Wang (pictured) said.

Oil futures provide oil explorers, refiners and consumers with a hedging tool against the volatility of oil prices and could help the world's second-biggest economy gain a bigger say in pricing energy.

The contracts in Shanghai, based on medium-density crude, would be priced either in yuan or US dollars, Wang said. The Shanghai exchange would attract foreign investors, oil companies, consumers and traders to play the contracts.

Active trading of the contracts would put the bourse on par with the New York Mercantile Exchange and the International Petroleum Exchange, where global crude oil prices are set via the their benchmark contracts.

China is a net importer of crude oil and the world's second-biggest petrol consumer, and has been a victim to rising global oil prices.

China Securities Regulatory Commission chairman Guo Shuqing is a strong advocate of a major liberalisation of the derivatives market, believing that trading energy products and commodities can benefit the national economy. Sources said Guo, unlike many of his peers who were spooked by concerns of runaway investments in the futures market, was enthusiastic about launching oil futures and government bond futures.

A raft of scandals on the mainland has deterred regulators from implementing bold liberalisations.

'Guo has faced resistance from conservative officials and was forced to carefully design the trading system, to make sure the new contracts will be a success,' said Yongan Futures Brokerage analyst Huang Lei. 'Failure in any of the new contracts could cause the central leadership to slow down the liberalisation pace.'

In February, the Shanghai-based China Financial Futures Exchange began simulated trading of bond futures.

Technical issues, including overseas delivery and foreign-exchange controls, are the sticking points that could prevent the Shanghai exchange becoming a major trading house for oil futures.

Cheng Siwei, a former vice-chairman of the National People's Congress and an economist, said Beijing should quicken the liberalisation of the futures market.

'Those who are against derivatives don't seem to know derivatives well,' he said. 'China has to be innovative in boosting the derivative market as long as the country hopes to increase its competitiveness in the global financial market.'