Residents pass by the Shanghai Futures Exchange, located in the Pudong District of East China's Shanghai Municipality, on August 1. Photo: IC

China's futures sector, a relatively niche market compared with other financial services such as securities and shares, has become more diversified in commodities and more open to both domestic and foreign investors, showcasing its attractiveness.

China began the trading of yuan-denominated, natural rubber futures - the technically-specified rubber (TSR) 20 futures - earlier this month, becoming the country's fourth commodities futures to open to both home and overseas investors. The preceding three were crude oil futures, purified terephthalic acid (PTA) futures and iron ore futures.

Listed on the Shanghai International Energy Exchange, the futures are contracts scheduled to be delivered from February to July next year.

The launch of TSR 20 trading will promote risk management in related industries using the futures market, and will form a multi-layer system interconnecting domestic and overseas markets, according to Jiang Yan, Chairman of the Shanghai Futures Exchange, Xinhua News Agency reported.

"Accelerating the opening of China's financial sector will help the country better integrate with the international markets amid the risks of escalating trade tension between China and the US," said Fang Xinghai, Vice Chairman of China Securities Regulatory Commission, at the launch ceremony of the TSR 20 futures on August 12.

Financial liberalization will also help boost the global profile of the Chinese yuan and will help China deal with threats from monetary hegemony, Fang noted. 

More commodities like liquefied natural gas, pork and chili are also expected to be launched on the futures market, Li Zhengqiang, President of Dalian Commodity Exchange, told the Institutional Commodity Derivatives Forum 2019 in Dalian, Northeast China's Liaoning Province, on Tuesday.

China is pushing ahead with the internationalization of its commodities, including palm oil, yellow soybean 1, linear low-density polyethylene and polypropylene, while providing policy guidance and services for qualified foreign institutional investors (QFII), according to Li.

Complying with the principle that a commodity is put on the futures market when it is ready, China has rolled out multiple new varieties since the start of this year, including maize, cotton, data and urea.

Yuan-denominated crude oil futures are the first futures variety on the Chinese mainland open to overseas investors. They started trading on March 26 of last year. 

Thus far, over 40,000 accounts have been registered for the futures trading. Oil and chemical industry giants, commodity traders and investment companies are among the active traders, according to the Xinhua report.

Additionally, the Shanghai Futures Exchange is mulling over the launch of non-ferrous metals futures to overseas investors "within two years as a rough timeline," Reuters reported in May, citing Jiang.

China pricing

By attracting overseas investors, futures can better reflect global markets and enhance China's pricing rights, analysts told the Global Times on Tuesday.

"With the futures market becoming more mature and open, and related regulations catching up, China will attract more overseas investors," said Dong Dengxin, Director of the Financial Securities Institute at the Wuhan University of Science and Technology.

The Chinese currency's circulation in the bulk commodities market will help promote its internationalization, Dong told the Global Times on Tuesday. 

"Along with attracting foreign investors to participate in China's commodity futures market, the yuan's role in international settlement will also be further enhanced," Dong said.

Following the launch of crude oil and iron ore trading in domestic futures during the first half of 2018, PTA, a commodity chemical and textile raw material, was opened to foreign investors in November last year.

As the world's largest producer and consumer of PTA, China, however, had no pricing rights for its upstream product PX and downstream polyester products. The output of PTA in China was recorded at 40.9 million tons in 2018, while its consumption peaked at 40.84 tons, according to a report from the Securities Daily.

"But now the situation has changed: Chinese firms are playing a bigger role in influencing the prices for both upstream and downstream products of PTA," a futures industry insider, who preferred to remain anonymous, told the Global Times on Tuesday.

As of the end of July, a total of 104 overseas investors, including 12 individuals and 92 legal entities, have been engaged in the PTA futures. Currently, daily transactions from these investors are recorded at 110,000, accounting for 7.83 percent, said the Securities Daily.

Li Qiang, director of the research center under Xinhu Futures, told the Global Times on Tuesday that, "Overseas investors are still learning and exploring the Chinese futures market, about its policy, regulation and capital liquidity, which will take some time." 

Most overseas investors hold an optimistic outlook toward the variety of the Chinese market, and they want to make attempts to risk hedging in the market along with the optimizing of its trading structure and pricing position, according to Li.

Return to real economy

As more commodities enter the futures market, they will drive the participation of enterprises in relevant industries, as the latter need to raise their awareness to use futures as a tool to hedge potential risks, analysts said.

Less than 10 percent of companies listed on China's A-share market are using derivative tools to hedge their risks, while among the Fortune 500 Global enterprises, about 94 percent actively use such tools, according to a report by the Economic Daily on August 22.

"Like the domestic A-share market, you can find many individual investors involved with the aim of speculation, which is not beneficial for the futures market's long-term development," said Dong, adding that more institutional investors are welcome as they can help improve the industrial chain and better serve the real economy.

"Around 40 percent of the world's product output and consumption is in China, providing many opportunities for relevant firms along the industrial chain to participate and benefit from the maturing derivative market, especially amid the uncertainties of the China-US trade tensions," said Li.