Chinese derivatives development appears far off

The timetable for the development of the Chinese regulated derivatives market, both domestically and for international investors, appears unclear, with the likelihood that foreign investors will not gain direct access to Chinese markets for several years at least, according to speakers at the twenty-third Bürgenstock annual Swiss Futures and Options Association meeting in Lucerne yesterday.

While some speakers emphasised the potential of the Chinese market, they hinted that regulation procedures and currency controls meant an open Chinese derivatives trade was still some time away. This could prove a blow for companies keen to manage their risk exposures within China, although one-off, foreign-currency denominated, over-the-counter Isda swap transactions are possible with specific government permission.

The potential for development, according to Charles Lee Yeh Kwong, chairman of the Hong Kong Exchanges and Clearing, which works closely with Chinese exchanges, is large. Citing World Bank figures, Lee said China was now the sixth largest economy in the world, with growth of more than 7% expected this year.

“The size, strength and scope of China’s economy, and its membership of the World Trade Organisation, suggest the derivatives market could offer many opportunities in the near future,” said Lee. “The possibilities are almost limitless. They range from energy products to industrial commodities to financial futures,” he added.

To date, copper futures trading, limited to domestic investors, has dominated trading at the Shanghai Futures Exchange. Soya, aluminium and natural rubber are other important futures contracts. Trading for the first half of the year hit 1.5 trillion yuan, up 31% year-on-year, with 8% of trades coming from institutional investors. Shanghai Futures Exchange chief executive Yang Jiang told delegates he was keen to see the introduction of a range of new products, including heating oil contracts, equity indexes and interest rate instruments, traded on the exchange.

While Jiang believes derivatives will be “important to China’s economic advance”, he said there were two key barriers to market development. First, China has only a temporary set of regulatory codes with regards to derivatives and is reviewing a permanent code – although the State Council of China, which is overseeing the development, has no fixed timetable. Second, the Chinese currency is pegged to the US dollar and under strict government currency controls. Jiang said there was “no clear timetable” for government relaxation of currency controls.