History of Futures in China

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China's futures exchange market has developed quickly in recent years. The combined turnover of China's three domestic futures exchanges hit 40.974 trillion yuan (5.612 trillion U.S. dollars) in 2007, up 95 percent over 2006, according to the China Futures Association (CFA). Analysts attribute the rapid growth of domestic futures markets to fluctuating agricultural product prices in international markets, a surging demand for agricultural products and positive central government policies.[1]

Origins of the Old Futures Market in China[edit]

In the winter of 1916, the revolutionary leader Sun Yatsen and Yu Qiaqing, president of Shanghai Chamber of Commerce, became concerned that unless Chinese authorities set up an exchange in Shanghai, foreign powers would be doing so soon. Accordingly, corporate charter and bylaws were written up to establish Shanghai Exchange Holdings Company and submitted to the Department of Agriculture and Commerce, but they were never approved. In the summer of 1918, the Beiping Stock Exchange was established as the first exchange in China. In June 1919, the Department of Agriculture and Commerce approved the establishment of the Shanghai Securities & Commodities Exchange to officially start trading in July 1920.

In 1921, following the opening of the Shanghai Securities & Commodities Exchange, a series of exchanges were established in Shanghai, and their number reached over 140 by October 1921. At the same time, a number of exchanges were opened all over China, including such major cities as Hankou, Tianjin, Guangzhou, Nanjing, Suzhou, and Ninbo. Toward the end of 1921, many exchanges started facing cash shortages, and as a result, 88 exchanges had to stop trading in the month of November 1921 alone. In the end, by March 1922, only 12 exchanges were operating in Shanghai.

Decline of Exchanges after 1921[edit]

In October 1929, the Republic of China government officially promulgated the Trading Act, and then in January 1930, the Operating Rules for Exchange Act. Meanwhile, new exchanges continued to be established in such cities as Qingdao, Hankou, and Tianjin, and by 1936 a total of 15 exchanges were trading from stocks to cloth and from gold to flour throughout China. In September 1946, Shanghai Stock Exchange Holdings Company was established to trade both securities and commodities, until the Shanghai Securities Building was closed on June 10, 1949. In July 1952, Tianjin Stock Exchange was finally shut down, and there would be no exchange trading in China for decades.

Beginning of New Futures Market[edit]

In 1984, the Central Committee of the Communist Party of China pointed out that “a socialist economy is a planned commodity economy based on public ownership.” Around 1987, some reports arguing for the establishment of agricultural futures markets started appearing, and in March 1988, the first session of the seventh National People’s Congress stated in the Government Work Report, “to speed up the reform of the commercial system and to actively develop various wholesale market trading, explore the possibility of futures trading.”

On Oct. 12, 1990, the establishment of the China Zhengzhou Grain Wholesale Market was approved to run on an experimental basis by the State Council, and while this new exchange mainly focused on spot trading, it also introduced the futures trading for the first time in the People’s Republic of China.[2]

On June 10, 1991, the Shenzhen Metal Exchange was established, and it started trading on Jan. 18, 1992. About four months later, the Shanghai Metal Exchange also started trading on May 28, and by the second half of 1993, the number of futures exchanges topped 50. China’s first futures brokerage company, Guangdong Wantong, was established in September of 1992.

Establishment of Regulatory Framework[edit]

On Nov. 4, 1993, the State Council issued “the Notice on Restricting a Blind Development of Futures Markets,” specifying the State Council Securities Commission as a monitoring body and the China Securities Regulatory Commission (CSRC) as an implementation body.

On Aug. 1, 1998, the State Council issued “the Notice on Further Rearranging and Standardizing Futures Markets.” On June 2, 1999, the State Council promulgated the Futures Trading Supervision Temporary Ordinance and corresponding regulations regarding exchanges, futures brokerage companies, and senior management as well as other personnel in the futures industry.

On Dec. 25, 1999, futures-related crimes were included in the Revised Criminal Law of the People’s Republic of China. The China Futures Association was finally established on Dec. 29, 2000, after years of consideration.

Reorganization of Futures Exchanges[edit]

In 1995, with the agreement of the State Council, the CSRC approved 15 pilot futures exchanges, while shutting down futures trading on scores of other exchanges. Then, following the State Council’s Notice on Further Rearranging and Standardizing Futures Markets, the 13 existing exchanges were consolidated into the Shanghai Futures Exchange (SHFE), whereas the Zhengzhou Commodity Exchange (ZCE) and Dalian Commodity Exchange (DCE) were kept as they were as independent exchanges.

In the meantime, the CSRC approved 35 commodity futures to be traded in those three futures exchanges.

Reorganization of Futures Brokerage Companies[edit]

In 1994, Chinese authorities prohibited futures brokerage companies from engaging in external brokerage business as well as foreign exchange trading. By the end of 1995, the CSRC allowed futures brokerage business licenses to 330 futures brokerage companies. To strengthen the risk management ability of futures brokerage companies, the minimum registered capital was raised to 30 million renminbi in 1999.

Resolution of Illegal Incidents[edit]

First, in 1994, the off-the-exchange futures trading was prohibited, and thereafter, Chinese authorities shut down the futures trading of steel, coal, and sugar in April 1994 rice and rapeseed oil in October. In February 1995, the 327 Treasury bond futures incident happened, [3] and after another cornering attempt involving series 319 Treasury bonds in May, the Treasury bond futures market was shut down. In 1996, red bean futures trading was also banned.

Gradual Development of Futures Market[edit]

In March 2001, the National People’s Congress approved the 10th five-year plan, which contains such a notion as the gradual development of futures market. In October 2003, the third session of the sixteenth National Congress of the Communist Party of China also called for the gradual development of futures market within the Decision regarding the Questions on the Completion of a Socialist Market Economy System. On Feb. 1, 2004, the State Council issued the Opinions on the Implementation of Capital Market Reform Opening and Gradual Development.

After 15 years of negotiations, in 2002 China became an official member of the World Trade Organization (WTO). This set in motion sweeping changes across the entire Chinese economy that had the potential to revitalize China’s futures markets as they could open up new opportunities for U.S. brokers looking for new markets in futures, securities, and financial services.[4]

Introduction of Futures Market Laws and Regulations[edit]

On June 23, 2003, the Supreme People’s Court issued the Provisions on Adjudicating Futures Dispute Cases, which took effect on July 1, 2003. On the same day, the Guidelines on Futures Industry Personnel Practices and Behaviors were officially implemented. On March 16, 2007, the State Council promulgated the Administrative Regulations on Futures Trading to take effect on Apr. 15.

New Records for Futures Trading Volume[edit]

After a record high of 10.06 trillion yuan in 1995, the annual turnover slipped to 1.6 trillion yuan in 2000. It then hit a new high of 10.84 trillion yuan in 2003. Thereafter, the annual turnover kept growing, having reached 21 trillion yuan in 2006 and 41 trillion yuan in 2007.

New Product Listings[edit]

On March 28, 2003, ZCE Strong Gluten Wheat futures contract was listed. In 2004, ZCE Cotton futures contract was listed on June 1, SHFE Fuel Oil futures on Aug. 25, DCE Corn futures on Sept. 22, and DCE No.2 Soybeans futures on Dec. 22.

In 2006, ZCE White Sugar futures contract was listed on Jan. 6, DCE Crude Soybean Oil futures on Jan. 9, and ZCE PTA futures on Dec. 18. In 2007, SHFE Zinc futures contract was listed on March 26, ZCE Rapeseed Oil futures on June 8, and DCE Linear Low Density Polyethylene futures on July 9. Most recently, SHFE Gold futures contract was listed on Jan. 9, 2008.

Establishment of China Futures Margin Monitoring Center Co. Ltd.[edit]

The China Futures Margin Monitoring Center Co. Ltd. was established on May 18, 2006, by the CSRC, through the approval of the State Council.

Establishment of China Financial Futures Exchange[edit]

The China Financial Futures Exchange (CFFEX) established on Sept. 8, 2006, and it started mock-trading of CFFEX CSI 300 Index futures on Oct. 30, 2006.