The move is expected to give state firms an efficient way to ward off risks due to changes in prices of commodities and raw materials for import and export, according to a circular jointly released by the China Securities Regulatory Commission (CSRC) and several other government departments Tuesday in Beijing.

More licences will be granted as market regulation improves and domestic enterprises become more familiar with overseas futures, the circular said.

This marks China's first time issuing rules specially designed to address trade in overseas futures, which has been falling since an official clampdown seven years ago.

"It is a very positive move that will set up standards for the business and make operations more transparent,'' said David Ding, an international financial expert.

The reform is also in answer to growing demands for overseas futures trade from Chinese enterprises hoping to make the most of economic globalization.

However, Ding said, sound regulations are important because of the high risk nature of the futures business.

A number of state firms began trading in overseas futures in the 1970s. The business experienced over-expansion in 1993-1994. Rampant speculation and lack of efficient regulation led to serious disorder in the sector, triggering hefty outflows of forex funds and heavy losses for many companies.

The government has tried to guard against a repeat of this situation by requiring all domestic enterprises that want to enter the market to first establish a sound internal management system that will help them avoid making the mistakes of the past.

Companies will also only be able to trade in futures of products they produceand the raw materials they use themselves.

Companies will be forbidden from holding a volume of futures beyond their own capacity and export and import quotas.

"This is to prevent companies from misusing the right to speculate,'' Ding said.

Prior to granting the new licences, the state had been allowing a few well-managed large-scale companies, including some oil giants, to continue trading in overseas futures without any formal approval.

These few companies are likely to become the first licence owners, Ding said.

To reduce risk in trade and settlement, the new rules stipulate that all firms authorized to trade in overseas futures should clearly establish the liability of futures traders and managerial and accounting staff. Regulators will conduct regular inspections of licenced companies.

(Chinadaily.com.cn 06/20/2001)