China exchange head says open futures trade to funds

China should open futures trading to investment funds to increase liquidity in commodities contracts ranging from base metals to agricultural products, the head of one of its three commodity exchanges said.

Beijing does not allow investment funds to trade futures, although many manage to do so through various channels. It is removing many of the restrictions in futures trading, in part to generate the liquidity needed for financial futures, including stock index futures.

The lack of big players like institutional investors is holding back the development of the market, which currently includes about 20 commodities contracts, Liu Xingqiang, president of the Dalian Commodity Exchange, said in an interview.

"The investor structure is obviously not rational for a commodities futures market. So far there is not one single fund investor in the futures market," Liu told Reuters on the sidelines of the annual meeting of parliament.

"We hope the government will come out at the earliest date with policies to allow investment funds or other institutions to trade futures."

The Dalian exchange is studying commodity indexes, like soybean and corn indexes, to provide more tools once institutional investors are allowed by Beijing to hedge, he said. It currently offers futures trading in the soy complex, as well as in corn, palm oil and plastics.

Dalian hopes to start hog futures in June or July but is still pushing regulators to allow cash settlement on the contract. It is studying rice futures but is hampered by Beijing's reluctance to lose control over the price of a staple grain.

Only 5 percent of investors in China's commodity futures markets are commodity producers and consumers, while the remaining 95 percent are private investors, Liu said.

Some investment clubs, which essentially function like funds but operate under the regulatory radar, are active speculators in futures markets. But they tend to invest opportunistically in whichever commodity is hot, contributing to volatile trading.

China's commodity futures markets have seen significant growth over the past five years.

Last year's turnover was 10 times that in 2002 but only represented between 150 to 160 percent of gross domestic product, which compared with U.S futures turnover at 20 to 30 times its GDP, Liu said.

Chinese regulations have made it difficult for foreign investors to trade directly on futures markets, although many do so through local brokers or joint ventures.

"Right now, the size of the market is still pretty small, and its capacity is small too. I don't think conditions are mature enough yet to let foreign investors into Chinese futures markets," Liu said.

"The market has to be pushed forward in a steady way."