The Great China gamble for futures exchanges
By Owain Johnson, chief products and services officer at the Dubai Mercantile Exchange
The Chinese market for futures is too large to ignore. However, opinions differ on how to make the most of the country’s undoubted potential.
No one can deny the scale of the
opportunity that China represents for international derivatives. The onshore
Chinese exchanges post huge volume numbers month after month while the
potential scale of outbound business, once the domestic market opens up, will
be a genuine global game changer.
The ‘believers’ argue that any serious
futures player should be engaging with China and preparing for the onshore market
to open-up. In contrast, the ‘sceptics’ argue that engagement is time-consuming,
expensive and will be ultimately pointless if China’s eventual opening is
one-way traffic only.
We are firmly in the camp of the
believers. Last year the Dubai
Mercantile Exchange (DME) signed an initial agreement with the International
Energy Exchange (INE) in Shanghai to work together on developing energy market
derivatives. We have seen how the
unparalleled rise of China as a demand and trading centre for commodities has
led to a tremendous surge of interest in risk management; we know how vital it
is for our business to be present at the birth of Chinese energy derivatives and
to position ourselves as a valued overseas partner.
But not everyone is prepared to wait for
China to open up its markets to international access. In December, ICE said it
would make the highly significant move of launching Chinese futures contracts
on its new Singapore exchange. Traditionally
it has been impossible for non-Chinese traders to access onshore contracts, but
ICE’s new exchange plans to offer an alternative to onshore Chinese futures
contracts but priced in US dollars.
The new ICE cotton and sugar futures
contracts will be based on futures traded on the Zhengzhou Commodity Exchange
(ZCE). This is the first time that any
exchange outside China has tried to make use of an established onshore Chinese
futures contract.
Not surprisingly, other exchanges are
watching closely to see what happens next.
The success or failure of these lookalike Chinese contracts will tell
the industry how much appetite there is outside China for dollar-denominated
versions of the giant onshore contracts.
In theory, demand should be good: Chinese futures contracts are some of
the largest in the world but are currently barred to entities without an
offshore presence.
What is most intriguing though, is the
scale of reaction that will come from the ZCE and Chinese authorities. Their
combined response will tell the broader industry whether China as a whole is
prepared to fight in order to protect their intellectual property from replication
by foreign exchanges. The next few
months, therefore, will tell the markets a lot about whether China will open up
on its own terms or whether foreign exchanges will anticipate that opening and
look to force the pace.
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