The State Council has approved the application of the Shanghai Futures Exchange to trade fuel oil futures, but the formal launch of the product will take at least another two to three months, industry sources said.

That has come as a surprise to many in the business, as it has been expected that corn or cotton futures, which are prepared in the Dalian and Zhengzhou commodity exchanges respectively, would land in the market first this year.

"The resumption of fuel oil futures has got approval from the State Council, but it still needs more preparation, and the authorities should choose the right time to launch the product," an industry close to the matter said.

Right now, Shanghai is still building the warehouse for the physical delivery of fuel oil and adjusting the designs of the contract as well as related trading rules, the source said.

The news of the State Council's approval of fuel oil futures was also confirmed by officials with the China Securities Regulatory Commission (CSRC) Monday, though they did not elaborate.

China opened oil futures exchanges in 1993 in Beijing and Shanghai, trading products including crude oil, gasoline, diesel and fuel oil. But they were closed two years later as part of an industry overhaul.

Moreover, the futures products traded in China are very limited - about a dozen, with almost no new products being launched over the past five years, except for the introduction of high-quality strong-gluten wheat in Zhengzhou last March.

As the market environment changes, the industry is recovering and calling for a wider range of products and less restrictions for traders.

Big oil users, for example, have been craving the resumption of these futures to hedge price fluctuations in the international market. As a major oil consumer, China needs its own oil futures market to enhance its impact on international prices, analysts said.

The resumption of the trade of fuel oil futures will also have a symbolic meaning paving the way for the trade of important oil products such as crude, diesel and gasoline.

"We hope that more futures contracts, including fuel oil, will be allowed in China as soon as possible," said China Futures Association Vice-Chairman Chang Qing.

Futures companies and exchanges have done numerous research and feasibility studies on product innovation, he said. It is more a matter of timing and final decision-making by the authorities before real movement is seen.

Other than oil futures, many agricultural products have also been discussed for years.

Dalian and Zhengzhou commodity exchanges, for example, have been applying for corn and cotton futures respectively. Both exchanges had hoped to get licences in the first half of the year, though insiders said much uncertainty lies ahead.

Li Lei, research director of China International Futures Co, said that more Chinese farmers had realized the importance of tracing price movements of agricultural products like corn and cotton, and they need a futures market to hedge risks of their own.

Such demand will increase as China reforms the circulation system of crops by introducing the market mechanism.

"But a problem with China now is low transparency in the procedure of product innovation and relative standards," he said.

It may take a lot of time to get the application approved by all government departments involved, while the futures market itself also lacks liquidity and financial derivatives to attract more investors.

Futures companies themselves are still prohibited from trading futures overseas or making futures investments on their own behalf, due to regulatory concerns for irregularities and risks.

But the situation has changed, and as other industries are gathering pace in opening-up, the futures market will also have to become more international, said Li Lei.

There are some positive signs of policy changes.

The CSRC, for example, is supporting a faster pace of innovation in the futures market.

Insiders also said that next year, the State Council would amend the provisional regulation on futures trading management enacted in 1999 and remove many barriers within the industry.

(China Daily March 30, 2004)