China sets stage for opening commodity futures to foreign investors

China has published draft rules to allow foreign investors to trade in some of the country's commodities futures, potentially paving the way for an imminent opening of a booming market as Beijing looks to increase its sway on global commodity pricing. China is the top global consumer of raw materials and has some of the most liquid commodities futures markets.
Although trading firms around the world are eager to access the country's commodity exchanges, state restrictions on foreign participation and currency flows have prevented the contracts from gaining global prominence. The draft guidelines, issued by the China Securities Regulatory Commission (CSRC) on December 31, cover increasing the number of futures contracts open to foreign investors, as well as operational procedures and cross-border legal supervision.
The CSRC said the Shanghai Futures Exchange's crude oil futures would be the first contract qualified foreign investors would be able to trade, adding that they could participate via approved overseas or local brokerages. They may also apply for direct trading licences with the bourse. The commission did not give details on other domestic futures contracts that would be open to overseas players. It approved the launch of the long-awaited crude oil futures contract last month.
The pubic has been given until January 31 to send feedback on the draft regulations. At present, foreign companies have limited access to China's booming commodities markets. Companies are only allowed to trade via brokers after setting up a locally registered non-financial unit, which requires a hefty amount of registered capital. The lack of institutional investors has led to China's futures markets being largely dominated by retail investors, making it prone to speculative trading.
Analysts said the move to bring in foreign players, especially institutional investors, would help develop the sector and usher in international practices. China is cautiously opening up its economy to market forces and liberalising its financial markets. Part of that effort saw the creation of the Shanghai free trade zone and the launch of the Shanghai Gold Exchange's international bourse, allowing foreigners for the first time to directly invest in the country's gold market using offshore yuan. China also opened up its equity markets in a landmark trading link with Hong Kong in mid-November, which gives foreign and Chinese retail investors unprecedented access to each of the two exchanges.