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China calls on domestic investors to boost commodity presence – Financial Times

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A labourer loads steel wire coils at a steel market in Taiyuan, Shanxi province, China © Reuters

China has called on its powerful wealth management and financial institutions to bolster their investment in domestic commodity markets as the largest buyer of raw materials seeks a greater say over prices.

Beijing wants to make it easier for commercial banks, insurance companies and pension funds with trillions of dollars in assets to invest in raw materials, Fang Xinghai, vice-chairman of the China Securities Regulatory Commission, said in a speech at a conference in Qingdao.

His comments helped boost commodity prices on Monday. Steelmaking ingredient iron ore rose 1.5 per cent to $54.70 a tonne, while copper added $50 to $5,722 a tonne.

Benchmark prices for most commodities are still set by western exchanges such as the London Metal Exchange or index providers such as Platts.

China’s domestic commodities exchanges already influence prices, such as iron ore, and although turnover in some contracts is the highest in the world, China still hasn’t “grasped” global pricing power, Mr Fang said, according to a transcript of his speech online.

He said China needed to broaden the products on offer for the wealth management industry by developing authoritative commodity indices that funds can invest in as well as commodity-backed exchange traded funds.

“Commodities are indispensable raw materials for the industrial economy,” Mr Fang said. “For China, a manufacturing and international trade power, investing a certain proportion into commodities helps us control strategic resources, even if there is adverse change in the international situation, and it also helps us secure the safe supply of strategic resources.”

While China has some 54 different commodity futures contracts, it lacks contracts for some “strategic resources”, he said, and added the country was currently working on a crude oil futures contracts and would continue research on a natural gas contract.

Turnover on China’s commodity exchanges in Dalian, Zhengzhou and Shanghai rose by 27.26 per cent last year to 4.1bn contracts, making up almost 6 per cent of global commodity futures and options turnover, he said.

But commodities still make up a fraction of asset allocation in China. China’s futures companies have total assets of Rmb279.2bn ($41bn), of which only 2.6 per cent is invested in commodity futures, with the rest in equities, bonds, and investment securities, Mr Fang said.

Commodities offer an advantage to Chinese investors because they are more correlated with global markets than the country’s equity and bond markets because of capital controls, Mr Fang said.

China currently only has an exchange traded fund tracking gold, which makes up about 5 per cent of the ETF market in the country, Mr Fang said. ETFs tracking futures for agricultural products, silver, and base metals are currently being considered by regulators, he added.

The call comes a year after China moved to clamp down on excessive speculation by retail investors in commodities by lifting transaction costs, margins and daily trading limits on some contracts.