More 'Oil' Needed to Lubricate Crude Oil Futures: Expert

Home>>Business

Last updated at: (Beijing Time) Monday, November 26, 2001

More 'Oil' Needed to Lubricate Crude Oil Futures: Expert

The Shanghai Futures Exchange has applied to authorities to resume crude oil futures, however, analysts pointed out that the possibility for the recent debut of the oil futures is slim, because "the game cannot be played with only a few State-controlled oil companies involved."

The Shanghai Futures Exchange - China's largest - has applied to authorities to resume crude oil futures. However, analysts doubt the possibilities for the oil futures to be approved in the short term.

Jiang Yang, general manager of the exchange, said late last week the crude oil futures and stock index futures have been put forward to the China Securities Regulatory Commission (CSRC) for approval, in a bid to rejuvenate the futures market and to promote its trading.

Far from Free Market

However, an official from the exchange indicated it may need more time for the debut of the oil futures as the oil industry is far from being a free market.

"It is relatively difficult for a futures product to come out in the near future on a firmly controlled market," said the official. "However, we should prepare in advance anyway."

China, the third largest oil consumer in the world, now only allows four State-owned companies to import and export oil. It has promised to completely open the oil market in five years after the country's entry into the World Trade Organization (WTO).

In September, Yang Maijun, director of the Futures Supervision Department of the CSRC, was cited by the Beijing-based 21st Gentry Economic Report as saying: "It is impossible for the oil futures to be listed high on the agenda before the market is completely liberalized."

Zuo Taihang, a director of the Economic Research and Consulting Centre under the State Economic and Trade Commission, said the oil futures - allowing traders buying and selling contracts that offer a fixed price on a given date in the future - will not only help oil users fix the price to fend off risk but enhance China's weight on deciding the international oil price.

"As a huge consumer, China needs its own oil futures products to reflect a domestic market scenario and to lure some international oil trading to China," said Zuo.

China, a net oil importer since 1993, is expected to see its domestic oil demand rise by 4 per cent annually to 245 million tons by 2005.

The Shanghai Futures Exchange official said China is in dire need for the futures to cushion the risk of oil price volatility, as China is increasingly exposed to the international oil price fluctuations upon WTO entry.

Slim Opportunity

However, Zhu Xingshan, an analyst with the Energy Research Institute under the State Development Planning Commission, said the possibility for the recent debut of the oil futures is slim, because "the game cannot be played with only a few State-controlled oil companies involved."

Zhu also said the slack supervision on the futures market may bias policy makers on approving the big commodity futures.

China's oil futures exchange was set up in 1993 but was closed by the government two years later, partly because of over-speculation on the market.

Tian Yuan, chairman of China Futures Association, said to develop the futures market the government should give the nod for expansion of the futures market with more new futures products, such as oil futures and stock index futures.

According to Yuan, China's futures transactions during the first 10 months of the year rose by 74 per cent on an annual basis.

In the January to October period, China's futures market reached some 90 million deals, with a total turnover of 2.3 trillion yuan (US$277.1 billion). This year's turnover is expected to reach 2.8 trillion yuan (US$337.3 billion).

Futures Market to See Rapid Growth

Chinese economists expect that the country's futures market will see rapid growth, spurred by the country's accession to the World Trade Organization.

After 10 years of development, China's futures market has played an important role in setting price standards, shedding risks and distributing resources in China's economic life.

Yang Maijun, director of the Futures Department with the China Securities Regulatory Commission, and leading economist Dong Furen said that China's futures market will be vulnerable to international market risks after its WTO accession, because of the lack of risk-control measures and regulatory system in the country's financial market. However, this has also created a large market potential for new financial products.

In the first half of this year, performance of China's 205 futures agencies was better than last year.

The Shanghai Futures Exchange, one of the three such exchanges in China, for example, posted 480.1 billion yuan-worth of transactions in the first eight months of this year.

Shanghai Futures Exchange

Shanghai Futures Exchange (SHFE) is a self-regulated non-profitable entity, providing the place, facilities and services to the centralized trading of futures contracts. At present, there are five contracts including Copper, Aluminum and Natural Rubber on the trading floor now, while Plywood and Long-grained Rice are still under modification. SHFE has a total of 208 members, within which, 144 are brokerage firms, and the rest are proprie-tary ones.

More about SHEF

China's Futures Market Promising