Offshore futures brokerages registered in Hong Kong and Macao can apply for the establishment of joint venture futures companies on the mainland, market watchdog China Securities Regulatory Commission (CSRC) announced late on Tuesday.

Under the latest closer economic partnership arrangement (CEPA) supplementary pacts signed between the mainland and Hong Kong and Macao special administrative regions (SARs) last year, joint venture futures brokers between mainland companies and the two SARs were to be allowed from this year.

The circular said overseas partners can hold a maximum of 49 percent in the joint venture - the upper limit much higher than the 33 percent for foreign parties in joint venture securities brokers.

For an applicant to hold more than 10 percent of the joint venture requires the nod from the CSRC headquarters in Beijing while a partner taking less than 10 percent has to get the approval from the regulator's local branch where the venture is located.

The overseas applicant should pump in at least 50 million yuan (US$6.2 million) each for shareholder equity and registration. They also have to have been operationally sound for at least five years and posted profit in at least the previous two years.

Although China promised the World Trade Organization that it would increase the overseas share limit for joint venture securities and fund management companies to 49 percent three years after entry, it did not make any commitment to open its futures sector to overseas investors.

"This is a very important development in China's futures industry. It is a milestone", said Jeff Huang, president of ChiSurf Ltd, a Beijing-based cross-border mergers and acquisitions advisory firm.

But the joint ventures would be set up only with top futures brokers because of the rigorous requirements of applicants, he said.

He also said that after the signing of supplementary CEPA pacts, many potential foreign investors were keenly awaiting details.

Last October, ABN AMRO Bank had kicked off talks with the mainland's biggest securities company, Galaxy Securities, to establish a joint venture futures company.

But the negotiations were suspended due to the lack of clear guidelines from the regulator, said Han Xiaobing, a Galaxy manager.

Now, the announcement will kickstart the talks, he said.

Although the domestic futures sector has many problems such as lack of sufficient products, onerous restrictions on business scope and the absence of a sophisticated risk control mechanism, the manager is optimistic.

In the last year alone, the regulator allowed the launch of four new products, he said.

The industry is climbing out of a slump and that is why foreign strategic investors are interested, he said.

China has only eight types of futures copper, aluminium, natural rubber and crude oil on the Shanghai Commodity Exchange, soybeans and bean dregs in Dalian and wheat and cotton in Zhengzhou.

Figures from the China Futures Association (CFA) show that transactions on China's three commodity exchanges in Dalian, Shanghai and Zhengzhou suffered great falls in the first five months of this year.

"We need to co-operate with overseas counterparts to improve our performance," said Chang Qing, chairman of JIFCO, a Beijing-based futures broker and vice-chairman of CFA.

Through the joint ventures, foreign brokers can bring sophisticated risk management and compliance practices to China. With improved transaction processing capability and back office strength, corporate governance will be enhanced too, he said.

(China Daily September 1, 2005)