Singapore 01/10/2015 - The opening-up of China's futures markets to foreign investors could be extended to other commodities including non-ferrous metals over time, making the country's forthcoming crude oil futures a significant test case.
The Shanghai International Energy Exchange - a subsidiary of Shanghai Futures Exchange (SHFE) - is expected to roll out crude oil futures before the end of the year.
This will be one of the first commodity futures contracts in China that qualified foreign investors will be able to trade via approved overseas or local brokerages or by applying for direct trading licences with the bourse.
China, the world's largest oil buyer seeks, is looking to establish a third crude oil price benchmark, rivalling London's Brent and West Texas Intermediate in the US.
Currently, foreign investors only have access to bullion futures - launched in September last year on the Shanghai Gold Exchange - in the city's free-trade zone.
Restrictions on currency flows and foreign participation have largely kept global investors out of China's futures market - foreign companies can trade via brokers but only after setting up a wholly owned subsidiary, which requires a large amount of registered capital.
But since China, the world's largest consumer of metals, would welcome greater influence in determining global metal prices, it is merely a matter of time before direct foreign trading is permitted in metals futures, industry participants said.
"The opening up of China's capital markets is a long-term direction for the country. We've already seen the gradual opening up of financial products to foreign participation over the years; other products are likely to follow in time," a Shanghai-based metals analyst said.
The SHFE's steel rebar, silver and copper futures are among the top five futures traded in the world, with trading volumes in aluminium last year exceeding those of the London Metal Exchange's contract, according to the Futures Industry Association.
And after the launch of its nickel and tin contracts in March this year, the SHFE also now offers the same main contracts as the LME. Still, SHFE prices are largely seen as having a strong China bias.
The exchange will struggle to have the same clout in the metals industry as the LME if it does not widen foreign access, sources claimed.
"To be a global exchange like the LME, the exchange must be for everyone and must reflect everyone's views. You need more people to participate in trading, including foreigners," a Shanghai-based commodities analyst said.
But Chinese currency controls and restriction on capital flows are hurdles for foreign investors, sources said.
"China's supply and demand fundamentals are affecting global metal prices. But it is not able to be a global price-setter as the renminbi is not an international currency," a Beijing-based analyst said.
"China wants to attract overseas funds and internationalise the renminbi. And whether China has a bigger say in determining global metal prices will depend on its forex policies," he said.
Beijing has been cautiously liberalising its financial and capital markets while making the yuan a more globally accepted currency to facilitate cross-border trade and investment.
But this process will take time given the differences between Chinese and overseas financial systems and governance. A step-by-step approach is needed to prevent excessive capital inflows and outflows in the near-term, KPMG China Global Practice said in a September report.
"We expect the scope of tradable futures to expand to other commodities listed on [the SHFE] and expect Chinese regulators to keep encouraging foreign participation by facilitating trading and settlement process," it said.
Crude oil futures will be a testing ground for China on whether the barriers to foreign access are lowered in future, a Shanghai-based copper analyst said.
"If the crude oil futures work out, metals could be next," he said.
(Editing by Mark Shaw)