A top foreign exchange regulator said Wednesday overseas futures markets have played a key role in helping selected Chinese companies hedge risks, further endorsing the importance of the futures market.

State Administration of Foreign Exchange (SAFE) Deputy Director Ma Delun said such markets have proven to be an effective means for them to circumvent cash market risks and lock in costs since the State launched a pilot program in 2001 to allow some leading domestic firms to trade futures overseas.

"Hedging risks through commodities futures are increasingly demonstrating their indispensable role," he said.

The China Securities Regulatory Commission has already approved 17 state-owned companies to trade on overseas futures markets for hedging purposes.

And it is currently reviewing applications from "a third batch" of Chinese companies, Ma said.

Domestic firms were prohibited from trading on overseas futures markets in the mid-1990s after rampant speculation and irregularities in the industry led to a government-ordered consolidation.

The pilot program was launched by the government in 2001 to allow some domestic firms to re-enter the overseas futures market as trade-related risks grew with China's accession to the World Trade Organization.

The domestic market is currently experiencing a slow recovery, with cotton futures launched recently after a long period of debate.

The licensed firms, mostly leading trade firms, are strictly forbidden from taking part in speculative trading.

Ma pledged Wednesday to enhance the verification of the commodity trade background of licensed firms' futures transactions in order to stop rampant speculation from upsetting the nation's foreign exchange market as in the 1990s.

The commission is revising tentative regulations on the pilot program after more than two years of experience, said Ma.

But analysts warned that such restricted access to international exchanges is inadequate in meeting the rising hedging needs of thousands of Chinese importers and exporters, as well as producers and distributors.

In the grain trade, for example, the government has partly opened its import quotas - 32 percent in corn, 50 percent in rice and 40 percent in agricultural oils - to foreign trade firms in line with its WTO commitments.

But the risky futures business has been made even riskier, according to industry insiders, who said that a dearth of such products on the domestic market means that an increasing number of Chinese companies dealing in grain, oils and metals have already been trading illegally in futures contracts overseas through their foreign partners, or foreign brokerages, to transfer risks.

Only around 10 types of futures contracts are currently being traded on China's three futures exchanges - Shanghai, Dalian in northeast China's Liaoning Province and Zhengzhou in central China's Henan Province. This sharply contrasts with the almost 120 types of futures traded in Chicago.

In another development, Ma underlined the role of qualified foreign institutional investors (QFIIs) in promoting the development of China's capital market and attracting new foreign capital.

Since China sought to usher in more foreign investment with its QFII reform in 2002, 15 foreign institutions have obtained a QFII license, while 12 of them have been granted investment quotas totaling US$1.78 billion.

They have invested 63 percent of their quotas in the local market, with the rest remaining in bank accounts.

(China Daily June 10, 2004)