Caixin
Aug 14, 2020 08:15 PM
FINANCE

Exclusive: China Eyes National Commodity Indexes as Demand Grows for Hedging Tools

An investor walks into an exhibition hall at the 16th Shanghai International Money Fair in 2018.
An investor walks into an exhibition hall at the 16th Shanghai International Money Fair in 2018.

As commodities trading booms in China, the government is planning to set up a series of national indexes to satisfy growing investor demand for tools to allow them to bet on future price changes and help them hedge their risks.

The China Securities Regulatory Commission is bringing together the exchanges to invest in a new commodity futures index company, with the aim of compiling the new indexes, sources with knowledge of the matter have told Caixin. The indexes would sit atop the plethora of different gauges offered by the country’s four futures exchanges and would then be used as benchmarks for new ETFs and other futures tools for investors.

The new entity will be set up in the Xiongan New Area, an economic zone some 100 kilometers (161 miles) southwest of Beijing that was set up in 2017 and is being touted as a northern equivalent of Shanghai or Shenzhen. The commission has sent out an internal notice to transfer employees to help set up the firm, a source close to the regulator said.

“Although each commodity exchange has its own futures indexes, there are no national unified commodity indexes across markets and product categories,” the source said. Compiling national commodity indexes is of great significance, as they will provide a foundation for all kinds of derivatives to meet the hedging and investment needs of futures traders and provide early warning signs for the country’s macroeconomic situation, the source said.

“The consumer price index and the producer price index reflect current prices, while national commodity indexes reflect futures prices,” one industry source told Caixin. “If futures prices are highly representative and have strong pricing power, commodity indexes can be used as an important leading economic indicator.” As futures prices reflect expectations for supply and demand, they can be “meaningful” in analyzing economic trends, he said, adding that from this perspective, the market needs such indexes.

China is one of the world’s top consumers of commodities, ranging from crude oil to soybeans, rubber and iron ore, but trading in commodities futures has a relatively short history compared with countries such as the U.S. China currently has four futures exchanges — the China Financial Futures Exchange (CFFEX), which mainly hosts A-share stock futures products, the Dalian Commodity Exchange, the Shanghai Futures Exchange and the Zhengzhou Commodity Exchange. The latter three primarily accommodate commodity futures products covering nonferrous metals, agricultural products, chemicals and energy, and there are exchange-traded funds (ETFs) that track their indexes. But there are no national indexes that could be used as benchmarks for commodity derivatives.

In 2019, turnover on China’s futures markets amounted to 290.6 trillion yuan ($41.8 trillion), a 37.9% increase from the previous year, while the turnover on the CFFEX was about 69.6 trillion yuan, accounting for some 24% of the total turnover on all domestic futures markets, according to data (link in Chinese) from the China Futures Association.

On global markets, there are many commodity indexes tracking global prices that investors use as benchmarks for futures trading. One of the most widely recognized is the CRB Commodity Index which comprises a basket of 19 commodities, with 39% allocated to energy contracts, 41% to agriculture, 7% to precious metals, and 13% to industrial metals. Other top indexes are the S&P GSCI, which is made up of 24 exchange-traded futures contracts that cover physical commodities spanning five sectors, as well as the Dow Jones-UBS Commodity Index.

Sheng Weimin, vice president of the research institute at Haitong Futures Co. Ltd., said that international commodities futures markets and products are already established and mature, but the domestic market still lacks some necessary functionality, and both the designers of such products and investors are still quite immature, he said.

Contact reporter Timmy Shen (hongmingshen@caixin.com) and editor Nerys Avery (nerysavery@caixin.com)

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