Published On: Sun, Feb 12th, 2012

China: Hedging to Raise Futures Volume This Year

China’s futures market will recover this year, after a plunge in trading volume last year dragged many brokers into the red, analysts said.

New contracts and expanded corporate hedging will enliven trading, they said, but a continued clampdown on speculation and tight liquidity would prevent a full rebound.

Last year, futures trading volume declined for the first time in five years, falling more than 30 percent, according to the China Futures Association.

While trading in gold, wheat and cotton surged, other contracts such as those for soybeans and rubber saw activity contract sharply. Volume sank further last month, falling 34.4 percent year-on-year.

The declines came amid an ongoing central government clampdown on speculation in the futures market, which it deemed too risky.

In response to the government’s campaign, exchanges nationwide increased margin requirements and suspended discounts for trading fees. They also acted to curb “abnormal” trades among related accounts, which further subdued trading volumes.

“Last year was really a tough year, with the government imposing many negative policies on the futures market. It was the worst year in my career,” said a broker with a futures brokerage company in Zhejiang province who declined to be identified, citing corporate policies.

The broker added that last year had seen many brokerages’ commission revenue cut in half.

However, conditions are expected to improve this year with many major new contracts.

The Shanghai Futures Exchange is expected to start the nation’s first silver futures contracts, on the assumption that investors will transfer some of their passion for gold to silver.

The Dalian Commodity Exchange plans to start trading iron ore futures, while the Zhengzhou Commodity Exchange aims to introduce contracts for silk.

More importantly, the China Financial Futures Exchange is likely to restart trading of government bond futures, which was suspended 17 years ago.

Wang Jun, director of the research division of the Beijing subsidiary of China International Futures Co Ltd, said that financial institutions and mining companies would participate more actively in the futures market this year to hedge “systemic risks”, which will help lift volume.

He forecast trading volume will rise to about 1.2 billion lots this year from 1.05 billion lots last year.

Analysts said the futures brokerage industry is facing a big reorganization in the face of declining commissions, the only source of income for most domestic futures brokerages.

“2012 will be a year of consolidation for the futures brokerage industry,” Jiang Changwu, general manager of Minmetals Futures Co Ltd, said.

Source: China Daily

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