Chinese Futures May Have A Future After All

After a crackdown, some exchanges are coming back to life

Qiao Gang, chairman of the Beijing Commodity Exchange Ltd., is used to meeting people skeptical of his work. The first Chinese member of the Futures Industry Assn., Qiao traveled this spring to the U.S.-based group's convention in Boca Raton, Fla., telling bemused investors that Chinese futures are arriving on the world stage despite a series mf setbacks and scandals. "The market is growing very fast," Qiao says.

Indeed, perhaps too fast. As in other industries, China is aspiring to enter the a global marketplace before it works out the laws and regulations needed to inspire confidence. In commodities, trading technology has sprinted ahead, but manipulation has disrupted markets and shaken investors, leading Beijing to ban a host of active contracts and shutter two dozen exchanges. Still, the news isn't all bad. Remaining exchanges have strengthened risk controls and introduced advanced technology. The government, meanwhile, is easing some restrictions and recently encouraged state enterprises to hedge in the futures markets. Regulators have also approved futures trading in nine commodities and limited trading in 27 others.

Beijing's watchdogs have made it clear that they won't allow the exchanges to grow beyond their control. The biggest regulatory action to date came when the government shut down trading of bonds--China's only financial future--after a Barings PLC-style blowup last year in Shanghai. The government also banned futures on gasoline, sugar, and other key commodities when high prices threatened to spark inflation.

To survive, the remaining exchanges have embraced technology. Computer-equipped traders can dial in via satellite from anywhere in China, opening the markets to all comers. "I don't need to be the Premier's cousin to jump in," says Paul Shang, senior director of Asian development at the Chicago Mercantile Exchange, who has provided assistance to the Chinese exchanges.

STEEP LOSSES. Yet many others doubt that the freewheeling markets can fulfill key functions. In the rush to launch new exchanges, ordinary citizens suffered steep losses trading in many unlikely commodities--from watermelons to cigarettes. Even better capitalized exchanges have had trouble enforcing rules. Traders have manipulated prices and walked away from losing transactions. But now the exchanges are introducing better controls. The Beijing exchange makes investors post margins before a trade can be consummated.

Additional government interference remains the biggest threat to Chinese futures. So far, multinationals have steered clear of the exchanges, believing the government will put central control ahead of market integrity. "I don't think they're anywhere near letting the market work on its own volition," notes Cargill Inc. CEO Ernest S. Micek. Many outsiders rule out investing until China's currency becomes fully convertible.

Despite official denials, some outsiders say that Beijing will eventually open the market to foreigners. "They'll have to allow foreign participation," says a Hong Kong analyst. "They need the liquidity." If that happens, Qiao Gang won't have as much trouble getting people to take his exchange seriously.

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