Launch of yuan crude contract no guarantee that it will give China pricing control over commodity

The launch of yuan-denominated crude oil futures next month is yet another attempt by China to wield its economic influence, but traders warn that although the contract is likely to be actively traded it will take some time before it can establish itself as a global benchmark.

“Active trading will probably be seen because investors are highly interested in the contract,” said Liu Yang, analyst at Citic Futures. “Crude oil has a big impact on a wide range of industries and a large number of companies have been expecting the trading to start [for some time now].”

China Securities Regulatory Commission (CSRC) last week announced start the futures trading on March 26, six years after its original launch date, with foreign players set to participate in trading on the country’s futures market for the first time.

The contract, based on medium-density crude, will be traded on the Shanghai International Energy Exchange, a 5 billion yuan (US$790 million) subsidiary of the Shanghai Futures Exchange. The energy exchange is based in the city’s free-trade zone, the mainland’s first Hong Kong-style free marketplace for further economic reforms.

“It is far from becoming a regional benchmark,” said Huang Lei, an independent commodity futures analyst. “The role of the yuan-denominated contract has been overstated during the past years.”

China, the world’s biggest net importer of crude oil, bought 420 million tonnes of the commodity in 2017, up 10.7 per cent from a year earlier.

Imported crude oil accounted for more than two-thirds of the country’s total consumption.

The mainland’s is also the world’s second-largest oil consumer, trailing only the United States.

Critics faulted the country’s lack of pricing power in crude oil for the higher bills Beijing paid for the commodity when global oil prices were elevated.

The decision to create the mainland’s own crude oil futures is because of China’s ambitions to secure bargaining power to price the energy source amid increasing reliance on oil imports.

The current global benchmarks include the Intercontinental Exchange’s Brent crude oil contract and the New York Mercantile Exchange’s West Texas Intermediate.

Crude oil sold in Asia is mainly priced against the Dubai, Oman and dated Brent benchmarks or Oman crude futures on the Dubai Mercantile Exchange.

The Shanghai Futures Exchange said in a statement that 149 firms will offer brokerage services to traders, but it did not reveal the number of investors that have registered to trade the contract.

Technically, oil futures provide oil explorers, refiners and consumers with a hedging tool against the volatility of oil prices.

The futures exchange said the yuan-denominated contract aims to better reflect market conditions in the Asia-Pacific.

It remains to be seen whether global oil giants such as ExxonMobil and Royal Dutch Shell will take part in trading of the yuan-denominated contract. Individual investors are not allowed to trade the contract unless they 500,000 yuan in their brokerage accounts.

A raft of scandals on the mainland’s futures market since the 1990s deterred regulators from conducting bold liberalisations as they prioritised risk control.

The crude oil futures was expected to begin trading in 2012, but the regulators, spooked by turbulence in the stock market and other commodity futures, put the plan on hold. The CSRC revisited the plan last year, but a tightened control on foreign-exchange to stem yuan outflows caused a further delay.

A trading start in late March echoed market speculation earlier that the crude contract would not receive a go-ahead until the end of the annual session of the National People’s Congress (NPC).

The State Council, China’s cabinet, will see a reshuffle during the NPC meeting starting on March 5.

“It will be just a baby step towards gaining pricing power in crude oil,” said Wang Feng, chairman of Shanghai-based financial services firm Ye Lang Capital. “A high turnover will not [necessarily] translate into a real pricing benchmark.”

The mainland’s A-share market, with the world’s second-largest capitalisation, is also among the most actively traded equity markets around the globe. But it was not until June last year that the global index provider MSCI decided to include 222 A-share firms into its benchmark emerging markets index, which represent 0.7 per cent of the indicator’s weighting.

“Globalisation is a long, long process,” said Huang. “To be precise, the Shanghai crude contract is just providing a yuan-denominated hedging tool for domestic oil firms and consumers. It will take several years before the contract becomes a regional benchmark.”