If approved by the Securities and Futures Commission, the new Hong Kong Mercantile Exchange (HKMEx), formed by private companies, will open next year, selling contracts priced in US dollars for fuel oil delivered to the mainland.
Oil prices are hurting businesses and affecting everyday life. At the end of last week, crude oil prices reached a record at more than US$142 a barrel, and as Libya threatened to cut output, Opec president Chakib Khelil predicted that prices may reach US$170 within months. While the economic pain is being felt globally, Asian economies, especially China and India, are feeling it more than others.
Without a crude oil benchmark in the region, Asians have never had any say in bargaining over oil prices with Middle East suppliers. While European and American oil importers pay prices they set at the International Petroleum Exchange (IPE) in London and the New York Mercantile Exchange (NYMEX), Asians must buy crude oil at prices fixed at the suppliers' profiteering whims, irrespective of supply and demand. Consequently, Asian importers are always paying more for the same oil than their European and American counterparts.
As one of the world's largest oil consumers and importers, China needs an oil-futures platform of its own to strengthen its bargaining power in the international oil market. However, there are obvious obstacles to setting up an oil derivatives exchange on the mainland. The market economy there is still in a rudimentary stage of development. The government still imposes price controls on a range of commodities, including oil products. The rapidly growing financial market is in need of more adequate regulatory arrangements, and yuan foreign exchange controls prohibit internationalisation of the market.
The mainland has three commodities exchanges, in Shanghai, Dalian and Zhengzhou, specialising in metals and agricultural products. Although the Shanghai exchange has been trading oil futures since mid-2004, participants are mainly domestic traders and contracts are restricted to fuel-oil futures, so the marketisation level of crude oil trading there has remained very low.
By contrast, Hong Kong, with its open and robust financial system and internationally recognised regulatory standards, is an ideal home for an oil derivatives market. In a report published last year, the Democratic Alliance for the Betterment and Progress of Hong Kong (DAB) proposed that the SAR government seek central government support for building Hong Kong into an international oil trading hub. Financial Secretary John Tsang Chun-wah promised to study the proposal. Mr Tsang wrote in the Post two weeks ago about the importance of an internationalised oil derivatives market to China, and claimed that Hong Kong could help the mainland bridge this gap.