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COLUMN-China's plan to boost commodity trading needs reality check: Russell – Nasdaq

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Reuters


(The opinions expressed here are those of the author, a
columnist for Reuters.)
    By Clyde Russell
    LAUNCESTON, Australia, June 20 (Reuters) - The call by
China's securities regulator for the country's wealth managers
to invest in domestic commodity futures is both encouraging and
somewhat bizarre.
    The China Securities Regulatory Commission (CSRC) aims to
promote the domestic derivatives industry by loosening
regulations that restrict how commercial banks, insurance
companies and pension funds invest in commodity futures, Fang
Xinghai, the commission's vice chairman, said on June 17.
[nL3N1JG285]
    Fang, who was speaking at a financial forum in Qingdao,
didn't give further details of the proposal, but it seems to fit
into recent moves by the authorities in Beijing to promote
commodity trading and become more of a player in global markets.
    The positive news out of the CSRC's announcement is that
China seems to be getting serious about opening up its markets
and encouraging a broader range of participation.
    Several commodity contracts have taken off in recent years,
such as iron ore on the Dalian Commodity Exchange (DCE). But
these have often been criticised as more like legal casinos for
day-trading retail investors rather than offering price
discovery or viable hedging for market participants.
    As part of efforts to boost commodity trading, China's three
major exchanges, the Shanghai Futures Exchange, the Zhengzhou
Commodity Exchange and the DCE, are planning to boost the number
of commodities that can be traded. [nL1N1JD07H]
    Contracts for certain fruits, chemicals and electricity are
among those being considered, adding to an already considerable
array of contracts for commodities that would be considered
somewhat obscure in Western markets, such as bitumen and
silicomanganese.
    But while expanding the amount of commodities being offered
and boosting the number and type of investors allowed to
participate in the markets sounds promising, it's not
straightforward.

    TRUST DEFICIT
    If there is one thing investors have learnt about the
authorities in Beijing is that they aren't afraid to intervene
in what are supposed to be free markets if they don't like the
price movements and volatility.
    On several occasions last year, the authorities took steps
to crack down on trading in then hot commodities such as iron
ore, steel and coal.
    Measures included increasing margins to be held against
positions and boosting the cost of trading on the exchanges.
    These steps did have some impact on cooling commodity
trading last year, but probably not to the extent that the
authorities wanted.
    The problem for investors in Chinese commodity exchanges is
that they can never be certain as to when, and how, the
authorities will act to clamp down on trading.
    Allowing financial institutions to trade in commodities may
smooth out some of the volatility, assuming they adopt
longer-term positions based on expectations of supply and demand
fundamentals.
    But if these investors choose to act more like hedge funds
in taking large positions in order to drive the market in their
preferred direction, it will boost volatility and undermine the
use of Chinese commodity exchanges as a hedging tool.
    As the world's biggest producer, consumer and importer of
commodities, China should have well-developed and open futures
exchanges.
    But simply loosening regulations to allow for greater
participation doesn't address the underlying problem in China,
namely the uncertainty of government interference and the trust
deficit this causes.
    To be truly effective, China's commodity contracts would
also have to be fully open to foreign traders, something that
isn't currently the case.
    But for foreigners to participate, regulatory certainty
becomes essential, meaning Beijing must curb its inclination to
intervene in the markets if it sees developments it doesn't
like.
    It's this problem that has so far prevented China from
setting up a crude oil futures contract, which would be aimed at
capturing a chunk of the global trade in this key commodity.
    The struggles of China, the world's biggest importer of
crude oil, to launch a viable futures contract covering the fuel
shows just how far the country still has to travel in its
ambition to become a global commodity hub.

 (Editing by Richard Pullin)
 ((clyde.russell@thomsonreuters.com)(+61 437 622 448)(Reuters
Messaging: clyde.russell.thomsonreuters.com@reuters.net))

Keywords: COLUMN RUSSELL/COMMODITIES CHINA (COLUMN)