China will follow a glacial pace in opening its booming commodity exchanges to foreign investors, as cautious regulators fashion rules to limit speculation that could drive up prices and currency convertibility remains a hot button politically. When China finally cracked its doors open to select foreign investors to trade on stock index futures in May, many investors wondered how soon regulators might put out the same welcome mat for the country's booming commodity exchanges. The answer is, a lot slower than investors hope. Trading firms around the world are eager to access China's commodity exchanges, which made up 51% of volumes of commodity derivatives traded worldwide in 2010, the World Federation of Exchanges says. As a key commodity buyer, China should have a bigger say in setting global prices, some domestic firms believe, but insiders said such concerns were far from the minds of its regulators, who are determined to keep speculative mania from driving up the price of commodities. "They do plan to get there. But the conditions are not ripe and there are deep fears of foreign speculation inflating product prices," said Chen Yonglin, vice general manager at Citic Newedge Futures in Shanghai. "There's still a lot of work to be done." With the derivatives market still in its infancy, China's three commodity exchanges in Shanghai, Dalian and Zhengzhou will also need time to spruce up legal and technical issues, and crucially, educate domestic investors on the risks. Further slowing the process of opening up the exchanges will be China's complex multi-level system of governance, which makes it necessary to secure agreement from the China Securities Regulatory Commission, the State Council and almost any ministry or agency that has some interest in the product. Moreover, China's own timetable of making Shanghai a global financial centre by 2020 shows that it is playing a long game. EXPLOSIVE GROWTH The staggering growth of China's commodity exchanges reflects the country's rapid transformation into the largest buyer of a plethora of commodities. In just ten years, the SHFE has overtaken the United States' CME Group to become the world's largest commodities exchange by number of contracts, or lots, traded last year. Driven by an astronomical rise in its copper and steel contracts, trading volume on the SHFE surged 43% from a year ago to 1.24 billion lots across just nine contracts, while transaction value jumped 67% to 123.48 trillion yuan (USD 19.09 trillion), the China Futures Association said in May. The Dalian Commodity Exchange in northern China, founded in 1993, which offers a range of products from edible oils to soybeans, has become the world's second-largest agricultural commodity exchange, while the Zhengzhou exchange (ZCE) does a roaring trade in white sugar and plastic futures. "Waiting on the sidelines are funds, exchange brokers overseas or banks. Basically any institution that is looking for new investment channels," said Feng Jie, a senior researcher at Xinhu Futures Ltd. "There has also been a lot of interest from international companies, especially those that have plants in China but source raw materials from overseas markets. Access to China's commodity exchanges will allow them to hedge more effectively." Tags: commodity exchanges, China

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