Those calling for a more developed futures market said China's economy has developed to a stage that needs a more rapid development of the futures market, stressing that the regulatory framework built during the first decade of the market is already strong enough to deal with a bigger market.

Trading of high quality wheat contract was launched on March 28 at the Zhengzhou Commodity Exchange. Cotton futures, which already won authorities' approval, are expected to begin trading in the second quarter of this year.

Although China's three futures exchanges have not obtained the final go-ahead from the authorities to launch other new contracts, they have been busy preparing for this. Dalian is studying corn; Zhengzhou is focusing on sugar and Shanghai is looking at rice, treasury bonds and the stock index.

Zhu Yuchen, president of the Dalian Commodity Exchange, said China is facing a more complicated market after joining the World Trade Organization, a situation that made more urgent the need for a well-developed futures market.

China is now more integrated with the global market and the prices of products are now determined by an increasing number of factors. This makes risk control a more prominent task for Chinese market participants, he said.

"A well-functioning futures market is greatly needed as a tool for risk-hedging," he said. "The market is too small right now."

A small market also has a liquidity problem. When the market is active, lots of hot money will rush to the limited type of contracts, resulting in excessive risks, Zhu said.

China's 12-year-old futures industry has been undergoing a painful consolidation since 1995, when the government began to impose restrictive measures in response to overspeculation and market irregularities that led to a number of damaging scandals.

The number of brokerages shrank to around 180 from a peak of almost 1,000, while only three exchanges survived, from more than 50. Regulators can now declare problem-ridden brokerages bankrupt, or force them to liquidate their assets.

The government also suspended many futures contracts such as steel and sugar and reduced the types of contracts from more than 50 at the peak to 13 at present.

The authorities also strengthened regulation.

Liao Yingmin, a researcher with the State Council Development Research Center (DRC), said these measures have paid off.

"A pretty complete and effective regulatory framework is already in place and participants of the market are now more rational," she said.

But exchange officials and researchers said the country's policy makers still appear to be very cautious in developing the futures market as the scandals are still fresh in their memories.

Wang Xianli, vice-president of the Zhengzhou exchange, said: "I don't think we'd see a repeat of the price-rigging activities because the government has imposed rules to regulate the markets better and investors have also become more mature in their investments."

Liao said many of the restrictive measures were introduced to clear up the market. Some of these measures, which now hinder development of the market, should be lifted to pave the way for an expansion of the market.

Simplification of the futures approval system is the reform that is most keenly awaited by investors and observers alike.

Under the current system, the right to approve new futures are shared by a slate of government departments, which will make the rolling out of new futures a very prolonged process.

Liu Lei, an official with the Zhengzhou exchange, said it had taken two years to get the cotton futures approved.

Some National People's Congress deputies raised the issue during parliament's annual session last month.

They suggested a committee be established as the sole body reviewing and approving the introduction of new futures contracts. Under the proposed scheme, the committee should be co-ordinated by the China Securities Regulatory Commission (CSRC), the securities and futures watchdog, and consists of representatives from relevant ministries and government agencies and experts. They determine which products are eligible for futures trading. But the exchanges themselves decide whether and when to roll out the contracts.

In addition, market players and experts also called for other amendments to the Provisions on Futures Trading Regulation - the centrepiece of the regulations governing the industry - such as permitting proprietory trading by brokerages to make them have more appropriate ways to make their business profitable.

Trade at China's futures market has become increasingly active since last year as market players saw the chance of further expansion. Turnover in the three exchanges during the first quarter totaled 1.6 trillion yuan (US$192 billion), which equaled the total amount in 2000.

(China Daily April 7, 2003)