Originally established in 1990, China’s futures market has evolved into one of the world’s major futures markets with an annual turnover of nearly US$68 trillion (438 trillion yuan) in 2020.
For many years, the majority of international futures trading was concentrated in the west such as the New York Mercantile Exchange (NYMEX) and the Chicago Mercantile Exchange (CME).
However, China’s futures market has undergone rapid development, and today, it is an international thriving trading hub that is open to foreign investors and capital.
In the past, foreign companies and investors had limited access to China’s futures and derivatives market but progress has been made and international investors can now trade in both US dollars and Renminbi (RMB).
On 13 October 2021, China Securities Regulatory Commission (CSRC) announced that from 1st November 2021 onwards, Qualified Foreign Investors will be eligible to trade commodity futures, commodity options and stock index options listed and traded on futures trading venues approved by the State Council or the CSRC. Tradings in stock index options shall be limited for the sole purpose of hedging.
There are three futures exchanges in China that investors should know about:
- Zhengzhou Commodity Exchange (ZCE)
- Dalian Commodity Exchange (DCE)
- Shanghai Futures Exchange (SHFE)
In this article, we will take you through 5 things and information you should know about China’s rapidly growing futures market and how you can participate and trade the Chinese derivatives.
5 Things To Know About Trading China’s Futures Market
1. Qualified Foreign Investors Can Now Trade Commodity Futures
Investors looking to trade the Chinese commodity futures market now have access to a wide variety of products.
Up until May 2020, China’s Central Bank had quota restrictions on foreign institutional investors in order to increase the internationalisation of China’s futures market.
Foreign investors are grouped into two categories, “Qualified Foreign Institutional Investors” (QFII) and “RMB Qualified Foreign Institutional Investors” (RQFII).
This is done to relax access and simplify the rules for foreign investors to participate in the Chinese futures market and allow trading firms to better segregate their clients.
2. What The QFII & RQFII Designations Mean To Investors
The difference between QFII and RQFII is that the former remits in foreign currency such as the USD which is then needed to be converted into RMB.
However, RQFIIs will have to utilise offshore RMB directly.
While there were restrictions in the past, the QFII and RQFII schemes are now rolled into one singular scheme that allows foreign investors to more actively participate in the futures market.
This not only allows for easier cash remittance but also access to various trading products apart from commodities futures such as stock options.
3. The Different International Products To Trade In The Chinese Futures Market
While there is a myriad of trading products available, here are some of the most popular products across China’s futures exchanges.
Through the Shanghai International Energy Exchange (INE), traders can trade Crude Oil futures, TSR20 Rubber futures, Low-Sulfur Fuel Oil futures, Copper Futures and Crude Oil Options.
In the Dalian Commodity Exchange (DCE), investors are able to capitalise on price, arbitrage and hedging opportunities in Iron Ore Futures, Palm Olein Futures and DCE Olein Options.
The Zhengzhou Commodity Exchange (ZCE) allows traders access to Purified Terephthalic Acid (PTA) Futures.
4. Stock Index Options Are Limited For Hedging Purposes
Thanks to the opening of China’s capital markets, foreign investors can now also access stock index options trading as well.
However, this is currently limited to hedging purposes only to prevent any unwarranted speculation in the Chinese markets.
With a focus on value-preserving transactions, China’s move to liberalise its futures market is based on allowing the market to grow sustainably while handling market participant risk.
As of late, treasury bond futures are not included in this opening, thus foreign investors cannot yet access or trade them.
5. Trading Futures As A Foreign Investor Requires An Overseas Intermediary
Trading in China’s futures market through exchanges such as the DCE and ZCE requires foreign investors to go through a domestic Chinese futures broker in China which is a certified member of the exchange.
However, foreign investors will be able to trade through an overseas intermediary broker as well.
This is essential as the overseas intermediary will help the foreign investor to set up a trading account with a domestic futures firm in order to start trading. The process can get complicated and cumbersome if an investor were to do it themselves.
Additionally, because Chinese futures brokers deal with RMB, this can be inconvenient for foreign investors. With an overseas intermediary broker, international traders can utilise foreign currency such as US dollars and offshore RMB to meet the trading margin requirements as well as trade free of trading taxes in China.
Through an overseas intermediary, foreign investors can swiftly gain access to China’s exciting futures market and start trading commodities such as copper, crude oil and iron ore to hedge their positions or take advantage of potential price movements.
