Crude oil, iron ore and natural-rubber futures have been earmarked as starting points for opening up China’s commodities market to more substantial involvement from foreign firms.
The policy change has been unveiled by China Securities Regulatory Commission (CSRC) chairman Fang Xinghai.
At present, foreign companies are able to hedge on China’s commodities market only after overcoming severe restrictions.
Under current rules, firms must undergo a costly, regulatory vetting process, requiring them to create special, local subsidiaries from which to conduct their trades – and even once those units have been established, they are only allowed to trade via brokers.
Fang’s announcement of impending liberalisation came in a speech at the Shanghai Futures Exchange annual conference.
He said: “A large number of international companies are engaged in spot transactions of commodities in China, and they have been calling for admission to futures trading in order to hedge risks. China will gradually open up futures markets, starting from internationally traded products such as crude oil, iron ore and rubber.”
The shift follows a concerted effort from the CSRC to crack down on domestic commodities trades, which recently experienced a huge spike of activity and accompanying turbulence.
During March and April, the regulator became aware of a sudden upsurge of speculation on iron ore, rebar, steel and coking coal futures, with steep price rises occurring in each field.
Those rises were promptly reversed after the CSRC brought in a clutch of mitigating procedures, some of which focused on blocking suspicious accounts.
In Fang’s view, by taking potentially illicit parties out of the picture, the crackdown has paved the way for greater participation from foreign firms – as China sets it sights on becoming a world-leading hub for commodities trades.
He explained: “We’re facing a chance of a lifetime to become a global pricing centre for commodities. On the way to realise this goal, we’ll see very intense competition. We have the advantage of trading size and economic growth – but our legislation is still not sound and we lack [sufficient] talent.
“Recently, domestic markets saw excessive trading volume and wild price swings in some commodity futures. We’ve guided exchanges to take a number of measures targeting speculative activities. The measures have achieved a notable effect, and exchanges should keep a close eye on commodity futures trading to crack down on illegal activities and maintain market order.”
He added: “According to our experience, the challenge for supervisors is not systematic financial risks from bringing in foreign participants, but rather… to prevent non-compliant trading by individuals with technical advantages.”