China will not be able to further grow its financial futures markets if it does not open them to the influence of international supply and demand, and it should do so now, said Leo Melamed, chairman emeritus at the Chicago Mercantile Exchange.
As president of the CME, he has been in touch with Chinese politicians and regulators since 1985. Melamed pioneered financial futures with the world’s first currency and interest-rate futures in the 1970s when he first took over running the CME.
The recent widening of the trading band for the renminbi and President Xi Jinping’s call to let market forces play a decisive role in the economy and plans to liberalise deposit interest rates within the next three years all suggest the Chinese financial system is strong enough to handle global competition.
“You already trade more soy beans than the Chicago Board of Trade,” Melamed said at last weeks’ Boao Forum for Asia. “The CSI300 [Shanghai’s main equity index] trades more than any other stock index in the world. Sure there are risks, but are you going to let those risks keep you on the sidewalk, or are you going to cross the street?”
He argued the renminbi is evolving toward full convertibility, which might be expected within three or four years.
To strengthen China’s futures market – which is an important complement to its securities and capital markets – requires taking the risky step of opening up to the world. As a first step, Melamed said it should distribute information about Chinese futures across international networks, so the rest of the world learns what China trades and how markets move. (He helpfully noted CME has such a network.)
“You would do this not to trade but to let the world see how you price, how things work here, and how that would affect them.” Distributing Chinese market data would not impact local regulation or local markets but it would educate the rest of the world.
“Your domestic markets have been successful but they are isolated,” Melamed said, noting that more than 80% of trading of Chinese futures is completely domestic. “Domestic markets can’t become big and important unless they also influence international pricing, and that requires competition. You can’t grow further without increased foreign interaction with markets.”
For example, he notes that China imports most of its energy. “But it can’t influence global pricing without opening its futures market to global crude oil futures markets.”
