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The success of hedging in overseas futures exchanges by chosen Chinese trading conglomerates may pave the way for further reforms that would grant access to more firms, market regulators say.
"Looking back over the last six months, the overall result has been fine," a China Securities Regulatory Commission (CSRC) official said, refusing to discuss specifics.
In November, the government allowed seven State-owned companies to hedge trade-related risks by trading futures in selected overseas futures exchanges.
The chosen ones were mostly foreign trade bellwethers in oil, grain and non-ferrous metals strictly barred from speculative trading.
"For these companies, overseas futures transactions, as a means to avoid cash market risks, have become an indispensable part of their operations," CSRC said in a statement. Such transactions "have played an important role in locking up costs and stabilizing operation."
To prevent chaos and irregularities, which eventually led to a ban eight years ago on overseas futures trading, strict regulatory rules are being implemented.
"As for the overseas futures incidents involving certain State-owned enterprises a few years ago, the root cause was a lack of internal control mechanisms and negligence on oversight of traders," a statement from the CSRC said.
CSRC and other ministries are now stringently supervising the seven licensed firms, pressing for establishment of internal control structures and independent compliance officers, checking their trades and futures positions every month and making spot inspections irregularly.
The commission acknowledged that the push for Chinese firms to use the international futures market grew after the country entered the World Trade Organization and said it would exercise caution in granting more licences, given the complex nature of the operation and the capital-account inconvertibility of the local currency renminbi.
Risk hedging on international futures markets is conducive to improving domestic enterprises' international competitiveness, strengthening our country's influence over prices in the international market, and protecting national interests, the statement said.
"We are considering (new licences) according to the rules," the official said. "But we'll be prudent when giving the approval."
He said many companies have expressed interest in getting the licence but have yet to file formal applications.
Rules governing overseas futures trading, jointly promulgated by five ministries last year, allow only industry leaders with foreign trade licences and considerable exposure to risks that can be transferred through futures trading to tap the overseas market.
(China Daily August 7, 2002)
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