15 February 2019

POLICY WATCH: FTZ fuels Shanghai’s commodity hub ambition

Shanghai hopes to fast-track its ambition to become a global commodity trading hub after getting the go-ahead from top regulators to launch crude oil futures trading in its newly opened free-trade zone.

The plan to develop an international oil futures trading platform in the zone and lure foreign investors falls under the broader efforts to upgrade the commodities markets in the world’s largest energy consumer. But without a breakthrough in reforming capital control, the zone may not live up to the high expectations, market watchers said.

The China Securities Regulatory Commission (CSRC), China’s top securities regulator, has approved a plan by the Shanghai Futures Exchange to build an international energy trading center inside the zone, which was inaugurated on Sept. 29, Shanghai Securities News reported.

Other measures include allowing securities and futures companies in the zone to set up subsidiaries and do over-the-counter trading in staple commodities and financial derivatives for domestic customers.

Foreign investors will be allowed to participate in trading crude oil futures in the market, a key step for the exchange to join the ranks of global leading commodity bourses like the Chicago Mercantile Exchange and the London Metal Exchange, according to market observers.

The Shanghai Futures Exchange, which will be home to the crude oil futures contract, is trying to attract overseas investors as part of a broader effort to transform itself into an international commodities trading hub. At present, it offers products mainly intended to hedge price risks and are only available to domestic investors.

The exchange official has talked about launching the contract as early as 2012, but the ambitious plan has been held back by currency convertibility problems. Hopefully, this major obstacle will be removed this time as Beijing vows to use the zone as a test bed for financial reform.

China intends to make a trial of the renminbi’s capital account convertibility and cross-border use of the currency, according to the blueprint for the zone released on Sept. 27. However, detailed measures have yet to be rolled out and the absence of top officials in the ceremony suggests that the idea is still quite controversial among policymakers, observers said.

Global institutional investors have been eager to tap into the Chinese market, which accounted for more than half of the commodity derivatives traded worldwide in 2010, data from the World Federation of Exchanges shows. China is the world’s second largest importer of crude oil.

Shanghai Futures Exchange has a booming domestic copper futures market which offers Chinese participants significant liquidity in trading the base metal, and the bourse aims to become one of the top global commodity exchanges in its five-year plan.

– Contact the reporter at [email protected]




Freelance journalist

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