Does China's crude oil futures succeed?

China Securities Regulatory Commission recently announced to launch the domestic crude oil futures by the end of this year. The authority hopes to make the futures market to be the global crude oil price index which allows China taking advantage to set oil prices.

The authorities have not decided which type of crude oil will be traded yet. They may choose domestic produced crude oil. Alternatively may select middle eastern oil, since more than half of China's crude oil imports are coming from the region.
Also the Chinese crude oil futures contracts may be traded in US dollar. The authority seems to think influence on international markets is much more important than usability for local Chinese players.

Commodity futures in China started in 1990. The first futures market was set up in Zhengzhou to trade grains. Then large number of futures markets and brokers were appeared during the first half of 1990's.  Because unregulated rapid expansion of Chinese futures market caused confusion, the government regulated the market strictly after mid-90's.
Currently, about 25 commodities futures are traded at three exchanges in Shanghai, Zhengzhou and Dalian following the consolidation.

Since industrial products such as non-ferrous metals and natural rubber are traded in Shanghai Futures Exchange, crude oil is likely to be launched there.
The following table shows annual trading volume in each futures exchanges. Trading volume of CME Group that holds CME and NYMEX is much greater than any others, but Shanhai market has already exceeded ICE that has Brent crude oil.

Chinese market was rapidly expanded during 2009 and 2010 when huge amount of speculative money due to the quantative easing flowed into the country's commodity futures.
However, Chinese government increased trading commissions, margins and trading size of contracts in November 2010 to cool down the market. Trading volume in 2011 shrinked to about half of the previous year's level following the regulation.
Even if the trading volume declined, Chinese markets still have huge transactions and the nation's increasing commodity demand keep global market players' eyes into China's futures market.

Meanwhile, arbitrage between China's futures markets and overseas markets is difficult due to strict regulation on currency exchange.
A lack of arbitrage impair price linkage between Chinese market and international markets. But it also means speculative turmoil in the Chinese market does not affect international markets directly.

The Chinese crude oil futures market is likely to be the domestic index since big state-owned firms like PetroChina will use it.
Gigantic trading volume will attract global market players eyes. Thus price movement in the Chinese market may affect global crude oil prices.
However, the limited overseas participants and the lack of arbitrage may prevent China's crude oil futures from being global price index.


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