China’s futures industry ready for primetime

January 12, 2014 10:38 AM
Blog first appeared in DanCollinsReport on Aug. 26, 2013

The China-US Futures Industry 2013 Summer Forum was a coming out part of sorts for the Chinese Futures Industry as industry leaders and many of China’s leading futures commission merchants (FCM) let those in attendance know they were open, ready for business and looking to build relationships and gain business from the West.

Wensheng Ma, chairman of FCM Xinhu Futures as well as the president of the Shanghai Futures Association and vice president of the China Futures Association spoke on the development and innovation of China’s futures markets at the Aug. 24 forum that was put on by the China Futures Association and Chinese Derivatives Association.

There are four futures exchanges in China that list 31 commodity futures contracts and one financial futures contracts according to Ma. All major commodities, some of which have the highest markets share globally, are listed except for crude oil.

There are 161 FCMs. The markets are regulated by the China Securities Regulatory Commission and the China Futures Margin Monitoring Center.

Ma pointed out that the Chinese economic structure with its heavy dependence on metals and agriculture creates great potential for growth in China’s commodity markets.

The industry is robust with professional hedgers and speculators employing trend following strategies according to Ma.

“We are seeing more than 30% growth year over year,” Ma said through a translator. He pointed out that in 2009 the Chinese government mandated that its futures industry serve the real economy, which has spurred the pace of development of both commodity and financial contracts.

MA pointed out that volume in financial futures (the China Shanghai Shenzhen 300 Stock Index Futures) has surpassed the total volume of all China’s commodities contracts in 2013 despite only launching in 2010 (see chart below).

Xinhu Chart



 By the end of the year he expects the futures market to exceed 250 trillion (renmimbi) in notional value.

Ma credits a lot of the growth to a solid regulatory structure and even took a dig at the U.S. Futures market regulatory structure.

“Every day each individual trader’s activities will be monitored in a central place (China Futures Margin Monitoring Center). It will prevent market manipulation and also prevent client’s funds from being used by other entities. We will not see a case like MF Global happen in China. We believe the current Chinese monitoring system is quite completely advanced compared to its international peers. We have a solid foundation for future growth," Ma says.

Another positive characteristic of China’s futures market is its impact on the economy according to Ma. “Commodity markets have been used widely by the physical traders for pricing and hedging purposes,” he says.

Simply put the market is doing its job of creating efficiencies by allowing producers to hedge their risk. And that efficiency is broadening into the financial world. “Financial futures has helped the futures markets integrate with financial sectors as well as improving the technology,” says Ma. “Both the exchange and FCMS have invested heavily in technology. All (China’s) exchanges are (speeding up execution times) from milliseconds to microseconds.”

The majority of accounts are individual accounts but Ma says that these are very sophisticated traders. “The reason the majority of accounts are held by individual investors is because it is tax free,” he says.

Finally the last characteristic of China’s futures markets Ma pointed out was a robust and well capitalized brokerage community.  “FCMs have a stronger capital structure right now. The total capital of all FCMs is about $400 billion.”

For years China has been viewed as an extremely tough market to enter but one people were willing, if weary, to invest in the hope of a huge payday down the road. Based on what was said by Ma and other heads of Chinese FCMs at the forum, China’s futures industry is ready for primetime and is not waiting for the West to come to them but rather reaching out to bring investors into its markets.

“Large financial institutions are going enter the Chinese markets. Overseas investors have followed China’s markets very closely and some already access the market,” Ma says.




About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.