CHINA'S FUTURES BROKERS have had more than a few tough years. So many of them have closed shop that they probably could give every former dotcom-er a shoulder to cry on. Yet, after long having their livelihoods sold short, they are getting a lot more bullish these days. Futures traders were formally allowed to set up an association early this year, about five years after the proposal was first put forward. The official media has more recently announced that a limited number of traders would be allowed to trade futures on overseas exchanges. And now, China's futures traders are gearing up for trade in rice-futures contracts on the Shanghai Futures Exchange. 'I am optimistic that this could be ready in the third quarter,' said Tang Kejun, an official at the Shanghai Futures Exchange. 'This will give farmers a way to limit risk and predict prices.' No doubt the new contract will play such a role, but the only predictable thing about the futures market in the past was its highly speculative trade. Chinese on the mainland refer to speculation as 'stir frying' - a term that is apt for describing the rice-futures market. The addition of rice-futures trading had already been approved by the State Council, or cabinet, but implementation was delayed, largely due to political sensitivities. In the early days of futures trading, China had lots of futures contracts in basic commodities such as rice and petroleum products, but this led to concerns over the stability of prices for key domestic commodities. China's communist leaders were particularly nervous about the prospect of wild fluctuations in the price of rice, the nation's most important grain. Mr Tang preferred to sidestep the issue of political sensitivity. 'We just did not have enough experience,' he said. China has had a little bit of experience with futures trading, however. Modern-day futures trading on the mainland dates back to 1990, when the first grain wholesale market was set up in Zhengzhou in Henan province. That later became a real futures market and the mainland eventually had nearly 50 such exchanges, which dealt in contracts from plywood in Suzhou to petroleum in Nanjing and rubber in Hainan. But the regulatory framework was unable to keep pace with the rapidly expanding markets. A series of scandals rocked the industry and embarrassed the nation's Communist Party leaders. The bond futures market gave rise to the most damaging scandal - one that involved price rigging and alleged insider trading by a number of government-owned companies. Wanguo Securities recorded huge losses on the bond market and was forced to merge with one of its rivals to form Shenyin & Wanguo Securities. Bond-futures trading was abandoned in 1995, ending the nation's brief experiment with financial futures, but new scandals emerged in other markets. China jailed two officials from Zhuzhou Smelter for unauthorised trading on the London Metals Exchange from 1995 to 1997 after they recorded losses of US$175.8 million. In 1998, angry investors staged several days of protests near Tiananmen Square after the general manager of a futures trading house ran off with his clients' cash. Smaller scandals emerged on the Hainan and Suzhou markets - which no longer exist - as well as Zhengzhou among others. But more recently, officials have been pushing to introduce a corn contract on the Dalian market, and sugar and cotton for Zhengzhou. Regulators have also been discussing the possibility of a futures contract that would be based on a new stock index created after the Shanghai and Shenzhen stock exchanges merge, though that plan is likely to require more time. China will move ahead cautiously with its rice-futures trading as the Shanghai exchange will deal in summer rice - a south China grain. Market-style reforms have their longest history in the relatively wealthy south which is seen as better able to absorb the impact of any price fluctuations. China has other interests in opening up rice-futures trading. It will soon join the World Trade Organisation and that will require a further dismantling of price controls and state subsidies that date back to the days of central planning. 'This is aimed at complementing our plans to move towards a more market-based economy,' said Mr Tang. It also will bring more foreign competition to the nation's farmers, and a bit of predictability in domestic prices would no doubt be welcome. Traders also were pleased by the plan though they made it clear they were not expecting this to lure many of their former colleagues back to their old offices. 'Government leaders have become a bit more familiar with what we do,' said a commodities trader in Shenzhen. 'In the past they were afraid of anything that might affect the market for key commodities. 'Over the long term it is good news. But it probably will not result in a lot of trading at first.'
