After years of slow progress on its planned launch of a crude-oil futures contract to give it greater influence in global oil pricing, China is now taking some bold strides to make it happen.
In an important milestone both for global oil trading as well as Beijing's liberalization of its capital markets, Chinese regulators earlier this month said they will allow qualified foreign institutional investors to trade in the crude-oil futures to internationalize the contract, giving overseas investors access to its commodities futures trading for the first time.
They are also mulling using both the Chinese currency and U.S. dollars to settle the oil contract, but even so it could be a long march before it gains international influence.
China wants to replicate the success of West Texas Intermediate and Brent crude futures, the dominant global oil benchmarks, and have a price that more closely reflects China's growing weight in oil markets.
The Shanghai Futures Exchange has for years been planning the contract but for this a slew of policy changes were needed, not least to make it internationally tradable, and a launch date still isn't clear.
Its current array of existing contracts, including copper, rubber and fuel oil, are traded heavily and serve as domestic price markers, but their appeal as international benchmarks remain limited.
"As China becomes more important in oil markets overall and its demand grows, it makes sense for China to have a contract to play a role in the pricing of oil," said Sijin Cheng, a vice-president for research at Barclays BARC.LN +0.95% in Singapore.
The contract could make China the third-largest crude-futures market in the world after the U.K. and the U.S., Guo Shuqing, chairman of the China Securities Regulatory Commission, was quoted as saying by Xinhua news agency earlier this year.
China's plan follows several other efforts to create an Asian benchmark that reflects demand and supply conditions in the region rather than inventory levels in Oklahoma or production glitches in the North Sea that often dictate the price of WTI or Brent crude. These failed due to insufficient liquidity.
China, now the world's largest oil consumer next only to the U.S., has much more at stake than in the early 1990s when it had a short-lived crude contract which was terminated due to rampant speculation and inflation worries.
"It's clear that China is looking at pricing its oil in a different way," said Christopher Fix, chief executive officer of Dubai Mercantile Exchange, whose Oman oil futures contract is also vying to become an Asian benchmark. "They're hopeful that they can influence the global price of crude."
SHFE did not comment for this article but pointed to recent comments from its General Manager Yang Maijun in an interview with a Chinese state-run newspaper in which he said the exchange had completed its research on risk-control and technology, and will carry out simulated trading as soon as possible.
"Also the exchange will use crude futures as a stepping stone to facilitate the internationalization of China's futures market by making policy adjustments and innovative reform," Mr. Yang said.
But whether the contract can rival New York Mercantile Exchange's WTI or IntercontinentalExchange's Brent contracts is far from certain.
China still maintains a tight grip on its oil industry, allowing only a handful of mainly state-run companies to import crude into the country, making their participation essential for the contract's success.
Under current plans, the physically deliverable contract will allow deliveries of as many as eight high-sulfur crude grades from China, Russia and the Middle East into bonded depots—a system that has some traders concerned about the cost of delivery and storage, and the possibility of buyers ending up with less desired grades.
Those concerns, along with restrictions on crude oil imports by dozens of independent refiners, could make the contract largely a mode of price discovery rather than a platform to buy physical oil.
Beijing's currency controls further complicate matters for foreign investors.
While the new contract will likely be priced in U.S. dollars, dollars and yuan will be used for foreign investors and domestic investors respectively for clearing and settlement, China's Global Times newspaper said in a report citing a director at the Securities & Futures Research Institute.
But perhaps the biggest obstacle could come from big oil producing countries, which would be wary of China's influence on prices, Mr. Fix of DME said.
"China's interest is in having the cheapest price of oil, but a consumer-determined price of a commodity may not be in the best interest of the producer," he said.
DME itself has not been able to persuade producers like Saudi Arabia to adopt its Oman contract as a pricing benchmark. That is despite trading volumes in the contract having risen more than three and a half times since its launch in 2007, making it the world's largest physically delivered crude oil contract. Its volumes however are still a fraction of trades on Nymex WTI or ICE Brent.
Mr. Fix said he does not see the new SHFE contract as a potential rival to his Oman oil futures, which he says is more focused on institutional investors while the Chinese contract will mostly target the retail market.
