Singapore 22/09/2016 - Attendees at the FOW Trading conference here cast doubts on China's ability to open up its commodities futures markets to overseas participants any time soon, they said.
Although the China Securities Regulatory Commission (CSRC) is seeking a bigger say in pricing commodities in the global market, last year's stock market crash is one reason why Chinese authorities are nervous about making it easier for foreigners to trade in its domestic markets for fear of lifting volatility, panellists at the conference said.
"The futures market is seen as a leveraged market in China and the government blamed leverage for the stock market crash. So an opening-up of the futures market to overseas investors will be a tough process," Zhou Jing, Fortune SG Fund Management's head of international business, said.
China's currency and capital controls also remain significant hurdles, Michael Coleman, director of asset management firm RCMA Group, said, describing commodity derivatives as a "zero-sum game".
"The Chinese government sees that the opening up of China's futures market will result in money outflow. China's retail investors will be sending money to [foreign] institutions. So that is not going to happen," he said.
“With currency controls, you can't have free trade in commodities… You won't see proper or easy access for external investors until you get currency convertibility," he added.
CSRC, China’s main securities regulatory body, has expressed its desire for liberalisation. Vice chairman Fang Xinghai said in May this year that the regulator will gradually allow overseas investors to participate in Chinese commodities futures trading by "creating conditions to allow more overseas futures companies to enter China while bringing in overseas investors".
On Wednesday, a report in China's Economic Daily, which was carried on the State Council’s website, acknowledged that Chinese authorities need to reform its futures market management system and refine risk controls.
But it stopped short of laying out the exact measures the government will take to encourage foreign access to the Chinese commodities futures market.
While Fang has spoken out about opening up the domestic commodities futures, CSRC chairman Liu Shiyu retains a conservative view on this, a Hong Kong-based market participant told FastMarkets on the sidelines.
"Ultimately, this is a decision that will be made by the CSRC's chairman and the country's premier," the delegate said.
PRELUDE TO METAL FUTURES INTERNATIONALISATION
Some attendees also saw the continued delay of crude oil futures from the Shanghai International Energy Exchange - a subsidiary of Shanghai Futures Exchange - as evidence of China's difficulties in launching commodities futures with foreign access.
The crude oil futures were supposed to be one of the first commodity futures contracts that qualified foreign investors would be able to trade via approved overseas or local brokerages or by applying for direct trading licences with the bourse.
The crude oil prices contracts, which were initially due late in 2015, appeared to have been delayed to late this year, according to media reports. But many delegates at the conference anticipate further postponements.
Still, some are optimistic given developments elsewhere - the Dalian Commodity Exchange is making headway in internationalising its iron ore contracts, Philip Ko, managing director of Citic Futures International Co, pointed out.
"They are trying to get this approved by the end of the year by the CSRC. The contract will allow foreigners to trade in China without setting up entities [there]," he said. "This is something the Dalian Exchange wants, which is to internationalise the market. We are working very closely with the Dalian Exchange to bring this on."
Investors are watching developments here since these should pave the way for the opening up of more commodities including base metals.
Foreigners are keen to access the Chinese commodities futures market, panellists said.
"The question we get from investors is: can you give us China exposure? How can you not give us China exposure when some of their contracts are the most liquid?" Daisy Liang, director and head of Asia investor relations at Gresham Investment Management Asia, said.
“The interesting price behaviours and nature of participants [in China's commodities futures market are] very appealing to global investors," she added.
Currently, only bullion futures at the Shanghai Gold Exchange are available to foreign investment in the city's free-trade zone.
China's restrictions on currency and capital flows, as well as foreign participation have largely deterred global investors from Chinese futures market, which is dominated by locals.
(Editing by Mark Shaw)