The Shanghai Futures Exchange will join hands with the Hong Kong Exchanges and Clearing Ltd. (HKEx) to build the first crude oil derivatives market in the two cities.

The two sides will set up a unilateral business model on crude oil futures to serve both domestic and overseas investors, said Frederick Grede, chief operating officer of the HKEx.

Representatives will be designated by the two exchanges to set up a joint working group to study the best form of cooperation and the potential market in the two cities, said Hu Zheng, deputy general manager of the SFE.

A memorandum of understanding (MOU) was signed by representatives of the two sides recently. The cooperation plan of the two exchanges will be submitted later to the China Securities Regulatory Commission for approval.

"Anyway, we want to introduce crude oil futures as soon as possible to transfer and manage price risks," Hu said.

China produces 160 million tons of oil annually, falling far short of satisfying domestic demand. An oil importer since 1993, and Asia's largest oil consumer, China imports 70 million tons of oil a year. China's oil imports in 2002 accounted for 30 percent of its total consumption.

Recent national statistics show that, by 2005, the gap between oil supply and demand in China will reach 100 million tons.

In accordance with its World Trade Organization (WTO) commitments, China will open its oil retail market to foreign investors three years from its date of entry into the WTO and its wholesale market five years from the date of entry.

Li Hui, assistant to the chief supervisor of SFX's Development and Research Center, said the crude oil futures will be "vital to the future economic development of the Chinese mainland and the rest of Asia".

China opened oil futures exchanges in 1993 in Beijing and Shanghai, but closed them down two years later during an overhaul of the industry.

(Xinhua News Agency April 16, 2003)