Chinese Futures Markets: Coming off a Booming Decade

China takes on futures

To all the superlatives that have been lavished on China one more deserves to be added: fastest growing center for futures trading. China's futures markets went from being a wild but obscure corner of the derivatives world to joining the ranks of the world’s trading hubs. Last year the three most active agricultural futures in the world by contract volume were Chinese: the Zhengzhou Commodity Exchange’s (ZCE) cotton and sugar contracts and Shanghai Futures Exchange’s (SHFE) rubber futures, which traded over 139 million, 128 million, and 104 million contracts, respectively. Out of the top 10 agricultural contracts by volume, seven were Chinese.

The stock index futures contract, launched only two years ago, is second in the world by notional value after CME’s E-mini S&P 500 contract. From 2000 to 2010 volume on China’s three futures markets grew at slightly more than 50% annually; from 27 million in 2000 to 1,566 million in 2010. Last year saw the first decline in over a decade as a weak stock market plus measures by the authorities to discourage excessive speculation caused a painful 32.7% contraction in volume. Still, even allowing for the smaller size of Chinese contracts, the performance of China’s futures markets over the past decade has been stunning.

The ascendance of Chinese futures was not a smooth one. China inaugurated its first true futures exchange in 1993. Its success spawned numerous imitators and soon Chinese futures were booming. A glance at the table of historical volumes (Table 1) shows a marked decline after 1995, however. What happened? The early boom in futures was too much, too soon. By 1993 over 30 futures exchanges were trading at least 50 contracts (no one seems to know for sure what the actual number was) on almost every imaginable instrument. Often the same product, with or without variations, traded on multiple exchanges. ...

The World Federation of Exchanges’ (WFE) “FOCUS” Magazine recently published this article by Nicholas Ronalds; CFA, President, RhoFinancial Consulting.

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