crude oil futures

China plans oil futures to strengthen global pricing power

The Shanghai Futures Exchange is planning China’s first crude-oil futures contract so the country can develop more influence over fuel prices.

China is one of the world’s biggest consumers of industrial and agricultural commodities, but its futures exchanges have yet to develop any influence over global commodity prices.

To improve that situation, the Shanghai Futures Exchange (SFE) is planning China’s first crude-oil futures contract, which could be launched as early as the end of this year so the country can gain the pricing power to match its massive demand.

The new futures contract “marks the opening up and innovation of China’s commodities futures market”, Wang Lihua, chairwoman of SFE, said at a forum in Shanghai, during which the plan was announced.

Despite a decelerating economy, China’s implied oil demand will still grow by 5% this year to 9.9 million barrels a day, according to the research arm of CNPC, China’s biggest oil producer. The average growth of implied oil demand was more than 7% during the last decade.

China doesn’t release actual data on oil demand, so implied demand, which is calculated by using refinery output plus net imports of refined petroleum, is used as a general indicator of the nation’s appetite for oil.

Chinese regulators have urged development of the country’s futures market to match its role as a major oil consumer. Guo Shuqing, chairman of China Securities Regulatory Commission, noted in a speech earlier this year that China “must focus on establishing futures for crude and other commodities, to gradually strengthen its pricing power in international markets”.

Guo’s remark has invited much speculation that a new crude futures contract will be launched soon, but SFE said that futures contracts required lengthy approvals from different ministries.

The futures exchange will allow foreign investors to take part in trading the contracts, which is part of a broader campaign to liberalise the nation’s capital markets.

“By opening up the market for foreign investors, the SFE aims to become a price-setter for oil in Asia and a global marketplace for crude futures,” Wang said at the forum on Monday. “We hope to build a market that can attract foreign investors, producers, traders, and consumers. We hope it will become one of the crude oil pricing benchmarks in the Asia-Pacific time-zone.”

That said, as China still imposes extensive capital controls, it will still be difficult for foreign traders to tap the market. The programme known as QFII, for qualified foreign institutional investors, allows foreign money to invest in China’s capital market, but doesn’t cover the commodity futures market.

Besides, not all of China’s financial experiments end in success. China launched a so-called B-share market in the early-1990s that allowed companies to float shares denominated in the US dollar and Hong Kong dollar, but the lack of liquidity meant that issuers moved on when better opportunities come along. Chinese companies have little incentive to use B-shares when they can list directly in the US and Hong Kong. Now the B-share market has been pretty much forgotten, even by the securities regulator.

SFE didn’t disclose whether the new contract will be denominated in US dollars or renminbi, nor did it reveal the size of the contract. Crude futures on the New York Mercantile Exchange trade in units of 1,000 barrels and prices are quoted in dollars per barrel.

Apart from the crude futures, SFE is reported to be mulling the launch of silver and iron ore futures contracts.

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