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.