China regulator approves launch of Shanghai oil futures

Dec 12, 2014 12:00 AM

China approved the launch of crude oil futures on the Shanghai Futures Exchange on Friday aiming to bolster global use of its yuan currency although some market players see China's lack of oil market liberalisation limiting the contract's appeal.

The world's largest crude oil buyer after the United States, China hopes the contract will become a benchmark in Asia and has said it will allow foreign investors to trade in the contract without setting up a local subsidiary.

The China Securities Regulatory Commission (CSRC) said it approved the launch but did not give a timeframe for when the futures would start trading.

"As China's first internationalised futures ... the contract will attract participants both domestic and foreign and an internationalised settlement platform will be established," CSRC said on its Twitter-like micro blog.

The contract will be priced in China's yuan currency, otherwise known as the renminbi, and the U.S. dollar, according to industry participants with direct knowledge of the plan.

The use of the yuan would fit with Beijing's long-term goal of globalising its currency.

PHYSICAL TRADING

But industry players said China's reluctance to liberalise its crude oil import market could limit the new contract's ability to attract trading.

"Without the opening of China's crude oil market, the futures contract is incomplete as it has to be backed up by physical trading of the oil to attract liquidity," said a Beijing-based trader with an international oil major. He said his crude traders would stay put rather than jump in to trade.

China imports more than 6 million barrels of crude oil a day, or nearly 60 per cent its requirements, but imports are dominated by state-owned traders while China's oil duopoly, Sinopec Corp and PetroChina, are the ultimate end buyers.

"Without the opening of China's crude oil market, the futures contract is incomplete as it has to be backed up by physical trading of the oil to attract liquidity," said a Beijing-based trader with an international oil major.

He said his crude traders would stay put rather than jump in to trade.

The contract may attract some level of speculative transactions in initial trading, but without the physical side to support it, its appeal could prove short-lived, traders said.

The crude futures will be traded in the Shanghai free-trade zone, touted as a testing ground for China's financial reforms, especially on yuan convertibility and interest rates.

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