Editorial: Inside China

Editorial: Inside China

The expansion of derivatives in China has been a rocky ride. The government and regulators have felt it necessary to intervene on numerous occasions cooling the country’s speculative and often over-heating derivatives markets.

During the 1990s the main Chinese regulatory body for exchange-traded derivatives , the China Securities Regulatory Commission, took drastic action to clamp down on what it viewed as unruly trading in derivatives. Over the course of two “Rectification” programmes, the CSRC cut down the number of exchanges from 40 to three and the number of contracts from 55 to 12.

Today there are four exchanges: the Dalian Commodities Exchange, the Zhengzhou Commodities Exchange, the Shanghai Futures Exchange and the recently launched China Financial Futures Exchange trading 26 contracts, all in the commodities sector with the exception of the CSI 300 index contract traded on the China Financial Futures Exchange.

Regulation surrounding the launch of new contracts is rigid with the government approving just one contract per exchange per year to launch. In addition, foreigners are currently unable to access the Chinese derivative markets, although there are plans to allow a small number of Qualified Foreign Institutional Investors to trade the CSI 300.

Despite the low contract number, purely domestic participation and high trading costs, volumes in China have soared in recent years rising from 161m contracts traded in 2005 to 1.5bn last year. At last week’s inaugural Derivatives World China, hosted by FOW and the Dalian Commodities Exchange, an audience of 400 local and international delegates heard a variety of views on China with hot topics including international access to the markets and the launch of options contracts.

With the QFIIs expected to begin trading on the CSI 300 index futures contracts as soon as the next quarter, speculation is rife that the market may further open up for foreign traders. In his keynote speech Jiang Yang, assistant to the chairman at the CSRC, acknowledged the importance of foreign traders in the development of the derivatives markets hinting that access to commodities contracts may follow the CSI 300 futures (more on this in this month’s FOW).

Options trading, however, may take more time. All the exchanges currently have proposals lodged with the CSRC to launch options on some of their contracts but, like many things in China, approval is likely to take time with one exchange head predicting that it could take up to ten years before options are traded on Chinese exchanges.

Fresh in the minds of regulators is the loss of $550m by China Aviation Oil in 2004 on the back of selling OTC crude oil calls (however, delegates at the conference correctly pointed out that such a loss would not have been possible with the use of exchange traded options contracts).

International exchanges are putting in the groundwork in anticipation of an opening up of both the international market to China and Chinese traders to international markets. Most of the international exchanges are currently consulting with Chinese exchanges and regulators on contract design and contract launches, building up relationships and brand awareness. As one international delegate said: “if you leave it until they open up, you are too late.”

For more on FOW in China, see this month’s edition out next week.

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