Shanghai free-trade zone

Commodities trading the latest move by Shanghai to talk up free trade zone

Commodities exchanges the latest idea for city's free trade zone, and part of its plan to establish itself as a hub for international commerce

PUBLISHED : Friday, 29 August, 2014, 3:06am
UPDATED : Friday, 29 August, 2014, 11:10am

In the latest attempt to raise the profile of its Hong Kong-style free port, Shanghai has unveiled ambitious plans to create a clutch of international commodity trading platforms in its free-trade zone (FTZ).

According to an action plan to develop the city into a centre for international commerce, major commodities including iron ore, cotton and copper will be traded on the internationalised markets inside the 28.8 sq km FTZ by 2015.

The announcement follows long-heralded plans to establish international boards for crude oil futures and gold trading in the zone.

The launch of the Shanghai FTZ last September was viewed as a first step by mainland China's most developed city towards transforming itself into a major global metropolis.

Oil futures trading has yet to be launched despite [its] announcement
Liu Yang, Citic Futures

Establishing international platforms for spot trading in commodities is quintessential to Shanghai's ambitions of becoming a hub for international commerce. They would be likely to help China gain more pricing power over commodities that play a pivotal role in the country's economic development.

The authorities "are required to speed up the preparatory work and try to enforce the policies soon", the municipality said in a circular published on Wednesday.

In 2009, Shanghai announced its plan to build itself into a global financial and shipping centre, and actively lobbied the central government to let it conduct bold financial liberalisation and simplify customs procedures.

At the time, the city shied away from announcing its ambition to become a centre for international commerce since city officials did not think Beijing would grant the necessary policy incentives. Beijing rejected the city's request to cut corporate tax in the zone from 25 per cent to 15 per cent before the zone's launch.

The announcement of the FTZ, a test bed for further economic reforms under Premier Li Keqiang , opened the way for the city's plan to woo international traders to conduct commodity transactions in Shanghai.

Commodity trading both on the spot and futures markets is off limits to foreign investors since the Chinese yuan is not convertible under the capital account.

The FTZ could facilitate the direct participation of foreign capital in the trading of commodities. However, planners have a long way to go to convince the investment community Shanghai could be a big marketplace for commodities.

The opaque legal system remains a primary concern of foreign investors, who believe that only effective rule of law can ensure fairness and transparency in dealmaking.

Aside from the legal issue, market regulators' capricious policymaking is a stumbling block to the early launch of such trading platforms.

"Oil futures trading has yet to be launched despite an official announcement by regulators two years ago," said Citic Futures analyst Liu Yang. "The regulators have exhausted investors' patience."