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Fang Xinghai: Serving the Belt and Road Initiative with Futures Market

Source: Futures Daily

Fang Xinghai, Vice Chairman of CSRC, recently points out in an article published on China Finance that the country needs to improve the listing system of the demand-oriented futures market to actively promote the listing of crude oil futures, gradually expand the variety of commodity futures and options, continually conduct research on new products including natural gas futures, commodity index futures and etc., further explore the path for RMB foreign exchange futures, and help manage risks for the Belt and Road Initiative. It shall attract the related businesses and financial institutions to participate in futures market, call on removal of policy restrictions, encourage and support businesses to make use of futures market to hedge and manage risks, research on and facilitate commercial banks and other financial institutions to manager risk through futures market with controllable risk, and support futures companies to provide the Belt and Road Initiative clients with diversified risk management services.

‘We need to push forward the internationalization of China’s futures market, enhance its pricing power in the Belt and Road area, and build a regional commodity pricing center’, says Fang. ‘ We may start with the more internationalized products like crude oil, iron ore and natural rubber, and then move to attracting the Belt and Road related overseas investors to engage in our domestic commodity futures market. Furthermore we will support futures exchange to set up overseas settlement warehouses and representative offices and continue to improve bonded delivery related policies. ’

In the article Fang also highlights the FX risks that may occur during the implementation of the Initiative. The emerging markets are quite fragile in their financial systems. The annual FX rate fluctuation of USD to RUB is as high as 20% and that of Lira is 15%. Infrastructures need huge capital and long time to construct. Currently such projects rely on the ‘Chinese Government Concessional Loan and Preferential Export Buyer’s Credit’, as well as commercial loans, and PPP financing, which lead to concentrated credit risks. The potential FX rate fluctuation may result in severe loss, and even regional liquidity crisis. There are rich resources along the belt and road, like oil and natural gas in central Asia and Russia, natural rubber, bauxite, nickel, and tin in Southeast Asia. These are key commodities in the global market. The Initiative will drive tremendous demand for nonferrous metals, steels, energy and chemical engineering, and the pricing power of commodities and the capacity for price risk management need to be enhanced. The derivatives market needs to be fully exploited and gradually open to the overseas participants. Real economy shall be encouraged to actively participate in the market and promote efficient management of price risk, to provide solid support to the implementation of the Initiative.
Fang also expresses in the article that we should actively get involved in financial infrastructure construction of the surrounding countries, as their capital markets are usually weakly built, particularly backward in financial infrastructures. China may get involved in the capital market framework design of these countries, as well as organizational arrangement, trading system and legislation, providing assistance to areas including personnel training/education, bilateral business and equity cooperation between exchanges and clearinghouses, to build a regional trade market for the belt and road countries, and optimizing funds and resources.

As Fang says in the article, in 2015 CEINEX was jointly founded by SSE, SZSE, CFFEX and DBAG, and in 2016, 30% of the equities of the Pakistan Stock Exchange (PSX) was acquired by CFFEX, SSE and SZSE. And partnerships with other countries including Russia is under negotiation. In addition, CSRC has entered into MOU with 26 the Belt and Road Initiative countries and regions region to build a fundamental cooperation framework and enhance partnership in the securities industry.

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