Encouraging signs are emerging that China's futures industry, still reeling from years of restructuring, will enjoy its best year of performance in 2006.

 

The country's three futures exchanges posted a combined turnover of 10 trillion yuan (US$1.25 trillion) in the six months to June 30, a sharp increase of nearly 60 percent from a year earlier, according to statistics provided by the China Futures Association.

 

The three futures bourses realized a 13.44 trillion yuan (US$1.68 trillion) turnover in 2005, which means "this year's trading volume is set to beat the previous year's level, or even that of 2004," said Zhang Long, a senior futures industry analyst with Beijing-based Shihua Financial Information.

 

In 2004, turnover reached 14.49 trillion yuan (US$1.81 trillion), a record level.

 

Analysts and industry players agree that the rise in commodity prices and new futures products are two major factors behind the market boom.

 

"The brisk trading seen in the first half of this year can be attributed to the rising commodity prices," said Chen Li, an analyst at Hangzhou-based Zhejiang Xinhua Futures Brokerage Co Ltd.

 

For example, the natural rubber futures contract, which is traded on the Shanghai Futures Exchange, was trading at around 13,000 yuan (US$1,630) per ton early last year, in stark contrast to more than 30,000 yuan (US$3,750) at the end of May.

 

"And the newly introduced commodity futures products also contribute a lot to this dynamic market activity," Chen added, citing the example of white sugar futures.

 

The white sugar contract, which is traded on the Zhengzhou Commodity Exchange, has become the most actively traded contract since its debut in January.

 

Encouraged by the healthy performance of new commodity futures products in the first half of this year, all of the three futures bourses are gearing up to introduce more commodities products.

 

Dalian Commodity Exchange, which introduced soy oil futures in January, has submitted four new futures products to the regulator this year, according to Wang Weiyun, head of its marketing unit.

 

They include plastics, a temperature index, paddy and ethanol.

 

Zhengzhou Commodity Exchange, the smallest one, is also active in this regard.

 

"The white sugar product has been a great success and we are preparing to launch more market-oriented products," said Zhang Lei, the exchange's marketing manager.

 

Shanghai Futures Exchange has applied to trade steel futures and is also actively preparing for a series of fuel futures such as liquefied petroleum gas (LPG).

 

"It is safe to say that this year the regulator will approve more new commodity futures products, given the confidence in the improving industry environment and the sound performance of new products so far," said Chen.

 

With the expected addition of more commodity products, analysts say, the market is set to grow more rapidly.

 

However, analysts and market players say the substantial catalyst for the takeoff of China's futures industry is the ongoing loosening of the regulatory framework.

 

The government is currently overhauling futures industry regulations to pave the way for financial futures and derivative trading, a move analysts say is indispensable for a fully fledged futures market.

 

"Currently, the major constraint on the futures market is the tight regulatory regime and the tight capital inflow," said a general manager at a Guangzhou-based futures brokerage, who asked not to be named.

 

According to the draft version of the revised rules, substantial changes are being made to the current regulations, introduced in 1999.

 

Futures companies, for example, will be allowed to trade overseas futures, offer futures asset management and conduct proprietary futures trading.

 

"The relaxing regulatory mechanism is music to the ears of futures companies and the futures market as a whole," said the general manager.

 

And the revised rules will, for the first time, allow for the launch of financial derivatives trading.

 

Stock index futures, the first financial derivative futures product planned in China, are expected to debut on the Shanghai Financial Derivatives Exchange later this year.

 

Industry players and analysts say the soon-to-be-launched stock index futures will fundamentally change the country's futures industry.

 

"The introduction of stock index futures will usher in a new chapter in China's futures market," said Zhang Long, from Shihua Financial Information.

 

"The trading will attract a large amount of capital to the futures market, and interest from institutional investors in the market is set to surge," said Zhang.

 

"Then the futures market will embrace an era of institutional investors," Zhang added, "this will ease the current capital shortage in the market."

 

The high expectations for the imminent stock index futures, analysts say, lifted market sentiment in the first half of this year and are likely to continue to boost the market in the latter half of the year.

 

"The positive atmosphere is necessary to a booming market and the new commodities, which are expected later this year, will ensure that the 2006 futures market is set for a record year," said the Guangzhou-based futures brokerage general manager.

 

(China Daily July 12, 2006)