New Chinese options to pave the way for open commodity trading

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As China prepares to introduce its first options contracts for commodity trading, the head of one of the country’s major commodity exchanges ignored fears that the move could add to the extreme volatility of raw materials observed in 2016.

“We [in China] are lagging behind in international markets because we have too few tools, too few products,” said Li Zhengqiang, chairman of the Dalian Commodity Exchange, adding that the introduction of more products and new instruments like options will help to cover the risks, not to increase them.

Regulators approved the launch of the country’s first commodity options last month, giving Dalian the green light to launch soybean meal contracts later this year, and for white sugar options at rival Zhengzhou Commodity. Exchange.

The approvals come after a year of record volumes in Chinese commodity futures trading. Explosive gains in Chinese steel and coal contracts in 2016 took international markets by surprise and sent prices higher globally. The futures trading boom alarmed regulators, who feared a repeat of the stock market turmoil experienced the previous year.

In 2016, the Dalian Stock Exchange saw its trading volumes jump nearly 50% from the previous year to Rmb 61.4 billion, three times more than in 2010. three Chinese stock exchanges reached a combined record of Rmb 177 billion last year.

Li, who wants the DCE to become one of the international centers for commodity pricing and risk management, says there is a growing consensus among Chinese officials on the need to adopt new financial products. China launched stock index options in 2015.

In an interview in the northeast port of Dalian, he said, “Society used to worry about new products, and so did officials. Now they have virtually no doubts.

Introducing options is the first of the exchange’s “three major strategic missions,” he said, in addition to allowing foreign investors to trade Chinese futures contracts directly and introducing swap contracts.

Options – which give the right but not the obligation to buy a financial contract in the future – would allow greater hedging flexibility for Chinese companies; swaps would allow producers and consumers to better protect themselves against commodity price volatility.

Both products boosted volumes and profits on exchanges around the world, but conservative Chinese regulators feared they would introduce even more volatility into domestic markets already notorious for wild price movements.

“We are behind on international markets because we have too few tools, too few products. And another downside: at the moment we are still a relatively closed market,” he says.

Foreigners can set up a registered company in China to trade Chinese futures, but the process is cumbersome. Mr. Li wants foreign investors to directly negotiate the Dalian iron ore contract and possibly its palm oil contract. Regulators have yet to sign off.

While China is the main buyer of most resources, including soybeans, iron ore and oil, its futures markets are in their infancy and Beijing is still looking to emerge from the era of state planning. . Only three years ago, he declared in policy reforms that markets should play a “decisive” role in the allocation of resources.

Mr. Li is pushing for the transformation of China into an international financial center at the height of its economic weight. International traders are already paying attention to China’s commodity exchanges — Dalian and the country’s two other commodity exchanges in Shanghai and Zhengzhou — which for several years have set the direction for international metals and grains markets.

But he understands the need to be careful. “For China to launch a new tool, a reform, it needs a suitable environment. And what does that mean? He needs the market to be relatively stable.

Mr. Li believes that the three Chinese stock exchanges will one day rival the LME or CME as global players. But for now, they must balance their mission of increasing trading volumes with preventing a socially destabilizing crash, he says. “Our responsibility is to maintain market stability. The burden on us to mitigate market risk is greater.

Additional reporting by Archie Zhang

Twitter: @HornbyLucy

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