Beijing vows to open commodity futures trade to foreign investors

Move to internationalise the market part of wider reforms.

PUBLISHED : Wednesday, 25 May, 2016, 4:02pm
UPDATED : Wednesday, 25 May, 2016, 6:59pm

Beijing pledged to take a major step forward in liberalising its commodity futures market by allowing foreign investors and domestic financial institutions to deal in contracts that bet on prices for crude oil, iron ore and rubber.

Fang Xinghai, a vice-chairman at the China Securities Regulatory Commission (CSRC), told a forum hosted by the Shanghai Futures Exchange in Shanghai on Wednesday that it was necessary to internationalise the futures market as China’s economic might increases. A developed and internationalised futures market was of great importance to China’s supply-side reforms because it would help find reasonable and market-based prices, he said.

Futures are financial contracts obligating the buyer to purchase an asset – or the seller to sell an asset– such as a physical commodity or a financial instrument, at a predetermined future date and price.

Growing calls by foreign firms to trade on China’s markets have to be addressed by the regulator and an opening up of the market would also be part of efforts to deepen the country’s supply-side reforms, said Fang, a technocrat known for his reformist outlook and key adviser of President Xi Jinping’s economic policies.

Fang said commercial banks, in order to better serve their high-net-worth clients, would be encouraged to trade commodity futures as a way to hedge risks and allocate assets. He did not give a timetable for the reforms.

Beijing has been giving verbal support to the growth of commodity futures trading, letting market forces play a key role in price setting, but concerns about runaway investment and unbridled capital flows across the border have deterred the CSRC from taking drastic action.

Fang’s statement is a clear message by the regulator that Beijing is standing firm on opening up and liberalising markets, despite the roller-coaster rides on the stock market last year that sparked worries the CSRC would slow the reform process in order to maintain stability on securities markets.

China has yet to launch its long-heralded crude oil futures trade on a subsidiary of the Shanghai Futures Exchange, which aims to gain pricing power over the key commodity.

Currently, China’s commodity futures market is off-limits to foreign investors. Only locally registered non-financial firms are allowed to trade China-listed futures through brokers.

“Equity investors and futures traders have reasons to cheer Fang’s remarks because he was boldly and loudly calling for further reforms though it remains to be seen when the plan materialises,” said Shanghai Shiva Investment fund manager He Yan. “The regulator has a lot of things to deal with, but the investment community hopes reform and liberalisation are still on its agenda.”

Fang’s remarks were seen as a fresh sign that the new CSRC regulators are taking a supportive stance on reforms, after putting on hold a series of planned liberalisations.

In March, Agricultural Bank of China chairman Liu Shiyu replaced Xiao Gang to take the helm of the securities regulator, which was tasked with shoring up investor confidence in a turbulent stock market.

The CSRC recently abandoned its plans to establish a new board for emerging industries and delayed the implementation of a registration-based initial public offering system. That triggered fears that the new regulators would back-pedal on their market-based reforms.

Fang, a former bureau director at the Central Leading Group for Financial and Economic Affairs – and a key figure behind Shanghai’s ambitions to become a global financial centre – was promoted to CSRC vice-chairman late last year.