In 2018, China has taken great strides towards globalizing its derivatives markets. Yuan-denominated crude oil futures contracts began trading internationally in March, followed by iron ore contracts that began trading internationally in May. And most recently, the China Securities Regulatory Commission granted UBS Group permission for a majority stake in its Beijing-based subsidiary in December — making it the first foreign bank to formally control a Chinese securities firm.
At the FIA Asia conference in Singapore on Nov. 29, key market participants expressed optimism that these steps are only the latest in a long-term effort to globalize the Chinese marketplace and more deeply connect derivatives markets there to the international investment community.
A panel discussion titled "China Opens Up" featured a diversity of perspectives on the topic from major commodity exchanges, brokers and regulatory experts. While the backgrounds of the participants differed substantially, the panelists shared an enthusiasm for continued improvements and growth in China's derivatives markets.
Jun He, executive vice president of the Shanghai International Energy Exchange, detailed the success of the exchange's recently-launched crude oil futures that have performed "better than expectations" since the product debuted in March. He noted average daily volume of about 250,000 contracts, and three successful physical deliveries to date.
"We have more than 70 accounts from overseas that have opened up with INE, and about 20% of them are institutional clients," he said through a translator. "The constitution of this 20% of institutional clients (includes) financial institutions or commercial clients or even oil companies."
"Their participation is quite active," he added.
Li Ning, chief representative of the Dalian Commodity Exchange's Singapore office, mentioned that international interest is also quite strong for DCE's iron ore futures that opened up to overseas trading in May. He noted that thanks to an already established market with a deep liquidity pool, DCE's iron ore futures featured accumulated volume of 200 million contracts from January through the end of October, with average daily open interest of 1 million contracts.
"Over 100 overseas institutional clients have opened accounts since May, and over 60 have traded with DCE," Li said at the FIA Asia conference. He also noted that "participation from overseas is increasing" and that open interest held by institutional clients has grown from 36% in early May to 44% by the end of October thanks in part to international participation in DCE's iron ore futures market.
Both exchange's executives stressed that these products are only the beginning of globalized derivatives products from exchanges in the region, and previewed specific products that market participants should expect in the next year or so.
INE's Jun He said the exchange plans to open TSR 20 rubber futures to global markets in the near future and that his firm is constantly pushing for new products and broader market participation. "Our main goal is to become the top ranking of the globalized futures exchange, and we will work in every effort to get to that point," he said through an interpreter.
DCE's Li Ning noted the exchange's roots in the agricultural commodities markets and current dominance in both soybean meal futures and corn futures contracts. "We have good reason to believe that before long, DCE will open more contracts in the agricultural complex to offer more risk management solutions and investment tools for market players in the international community," he said.
While the success of new products is obviously good for the exchanges, they are also good for brokers and end-users who have seen China as a missing part of the global puzzle, said Eric Jen, chairman and CEO of Yuanta Futures Hong Kong.
"As an intermediary broker, we're happy to see (new products) because this market in China is new and it's different and it brings us a lot of opportunity to have contact with the client because they are interested in this market," Jen said. He added thhere is a great deal of international interest in China markets at present.
Of course, the road is never completely smooth and there is ample opportunity for improvement and education on the evolving derivatives landscape in China — including improving the cost of trading and margin calibrations as well as with the nation's legal and regulatory framework. Panelists were willing to admit China has room for improvement but as a group they also cautioned international investors against expecting the nation to behave like their home markets.
"Futures markets, especially commodity futures markets, are created to meet the needs and demands of the physical users and to serve the real economy," said Li of the Dalian Commodity Exchange. "The physical economy markets in different countries and the real economy in different regions have huge differences."
Furthermore, it's important to understand Chinese regulators are trying to delicately balance local priorities with international demand. This is evident by efforts to "open a few windows instead of just opening the door overnight," said Natasha Xie, a partner at Beijing securities law firm JunHe.
"Those who are just casual observers may think the regulatory environment unpredictable, but those who pay attention will have a sense of how the regulatory landscape will evolve and see consistency," she said. "You need to understand the philosophy and the culture behind it: Tidy up the local market and ensure that the local market grows healthy and also stable. That's very key and of the highest priority. "
And of course, the motivations of exchanges in China informs how quickly they are willing to bring new products to market.
"The Chinese exchanges are not the same as the international exchanges. We are not demutualized. We're not publicly listed companies, and there are different priorities," said Cecelia Zhong, chief marketing officer of Guojin Metal Technology and Chief Executive Officer of Guojin Resources. "The market running smoothly is much more important."
The simple presence of such a discussion at the FIA Asia conference, however, is proof that the future is bright for Chinese derivatives markets, said Zhong.
"Opening up China's markets will definitely benefit everyone in this room. That's why we are all here listening," Zhong said. "Everybody wants to listen to what you're talking about in an international language. I'm telling myself, 'How amazing!' Here we are, seven native Mandarin speakers, talking in English" about Chinese derivatives markets.