The Shanghai Futures Exchange aims to broaden its membership to include institutional and foreign investors as the bourse attempts to attract overseas capital to the world’s biggest commodities consumer amid flagging volumes.
“We are studying how to allow banks, trusts, securities and fund companies to enter the commodities markets,” Yang Maijun, general manager, said in a written interview. The bourse hopes to expand the market within the next five years, Yang said. The exchange has already approved the local units of Australia and New Zealand Banking Group Ltd. and HSBC Holdings Plc. to trade gold futures.
Allowing foreign companies to trade futures would increase China’s influence in setting global benchmark prices for copper, gold and rubber. The Shanghai exchange’s trading volume tumbled 52 percent this year as regulators cracked down on speculation and the London Metal Exchange and CME Group Inc., the U.S. owner of the world’s largest futures market, stepped up efforts to capture more business from Asia.
“Foreign investors will only pay attention to this market once they can participate,” said Ren Gang, head of research department at Maike Futures Co. in Shanghai. “Otherwise, the prices are just references.”
The exchange has nearly 400 members, most of which are futures brokerages, according to the bourse. Trading volume in January-November fell to 281.95 million lots after jumping 43 percent in 2010 to 621.90 million lots, according to the China Futures Association. China’s commodity futures markets are off-limits to overseas entities that are not locally registered.
“Introducing institutional and foreign investors is a must,” said Lin Hui, head research department at Orient Futures Co. in Shanghai. “It can help local markets to mature.”
The combined volume of the three bourses located in Shanghai, Dalian and Zhenzhou, tumbled 34 percent in January to November a year ago to 936.11 million lots, data from the association showed. Turnover fell after regulators tightened controls on speculative trade.
“The structure of market participants isn’t appropriate,” as retail investors now account for the bulk of trading, said the exchange’s Yang. Besides the introduction of institutional investors, China’s futures markets should also gradually open to foreign players to diversify the investor pool, he said.
There are 26 commodity futures traded in China, including copper, soybeans and gold. Authorized state-owned companies, private firms, and individuals still tend to participate in overseas markets, especially in London and New York, as trading there sets the global benchmark for prices.
Chicago-based CME Group Inc. is in talks with the China Securities Regulatory Commission about measures that may allow some Chinese futures brokerages to trade on the exchange, China Daily reported on Dec. 1, citing CME President Phupinder Gill. The exchange plans to start a clearing house in Asia and increase the number of employees in the region, according to the report.
The London Metal Exchange held training sessions in Beijing, Shanghai, Hangzhou and Shenzhen in November after starting mini-contracts in copper, aluminum, and zinc settled in cash with the Singapore Exchange in February. It also started Asian benchmark reference prices for three-month copper, aluminum and zinc in January.
To become a price discovery center takes a long time, and only when there is wide participation from investors at home and abroad can prices become benchmarks, Yang said.