China challenges Europe, US benchmarks with launch of first oil futures contracts

Long anticipated debut of yuan-denominated contracts comes after China surpassed the US to become the world’s largest crude importer in 2017

PUBLISHED : Monday, 26 March, 2018, 11:27am
UPDATED : Monday, 26 March, 2018, 11:33pm

China has launched its first ever oil futures contracts denominated in the local currency, a crucial step by the world’s biggest oil importer that will allow it to wield greater pricing power and challenge industry benchmarks in Europe and the United States.

Liu He, the newly appointed vice-premier taking charge of the finance portfolio, has underscored the role of the contracts and has given directions on how to build a sound market, Liu Shiyu, chairman of the China Securities Regulatory Commission, said before trading opened on Monday. He added that the futures contracts were another milestone for Shanghai as it bids to become a global financial centre.

Amid the mainland’s increasing reliance on imported oil, the introduction of the crude futures contracts is being viewed as a significant move by Beijing to exercise its pricing power, ensure national energy security and promote the use of the yuan around the world. The move also comes as strained Sino-US trade relations threaten to cast a shadow over the global economic outlook.

“The contracts, denominated in yuan, can technically help China gain pricing power and internationalise the yuan, if a mature market with strong trading activities by global investors is set up,” said Shao Yu, chief economist at Chinese securities company Orient Securities. “But it takes some time before global investors recognise the contracts as benchmarks.”

China surpassed the US as the world’s biggest oil importer in 2017, giving the Chinese government an additional impetus to wrest pricing control from offshore markets, as well as to promote the international use of the yuan in commerce.

“Crude oil futures give Shanghai a new boost in developing a global financial centre,” said Liu Yang, an analyst at Citic Futures. “Trading volume will appear to be huge based on China’s economic scale and the commodity’s wide use. More importantly, it is the first internationalised commodity futures where foreign investors are warmly welcome.”

Huang Lei, an independent futures market analyst, said: “This is a big leap forward as Shanghai aims to be a regional hub for commodity trading.

“The city has got an important investment tool for global investors.”

Beijing’s ultimate goal is to create a crude oil benchmark in Shanghai that can help it wrest some pricing power away from international competitors such as Intercontinental Exchange’s Brent contract and the New York Mercantile Exchange’s West Texas Intermediate (WTI).

The most active September contract settled at 429.9 yuan (US$68.28) per barrel on Monday, down by 2.3 per cent from an opening level of 440.0 yuan. The price was about US$3 higher than that of the WTI crude contract for May delivery, while nearly US$2 lower than the price of Brent crude.

Within the trading session, the contract fluctuated between 426.3 yuan and 447.1 yuan. About 40,656 contracts worth 17.64 billion yuan changed hands.

The crude oil futures are the first commodity futures contracts in China that invite participation by foreign traders.

The mainland imported 420 million tonnes of crude in 2017, up by 10.7 per cent from a year earlier. More than two-thirds of China’s oil consumption was met by imports last year.

“China must have its own oil futures contracts, even with a long delay,” said Jiang Mingde, chief strategist at Yixinweiye Fund Management. “The contracts are not only a hedging tool for businesses, but an important element in the national economy given the significance of the commodity.”

China first planned to launch yuan-denominated futures contracts for crude oil in 2012, when oil prices exceeded US$100 a barrel.

Before these crude contracts, foreign investors were barred from trading commodity futures on the mainland futures exchanges, unless they had set up mainland-based subsidiaries that were allowed to trade the contracts for hedging purposes.

Additional reporting by Laura He