China launched crude oil futures contracts trading on Monday at the Shanghai International Energy Exchange in its opening-up in the financial sector.
They were the first futures contracts listed on the Chinese mainland to overseas investors, putting domestic and foreign investors on equal footing.
Overseas investors can invest in the futures contracts through various means. At the initial stage, US dollars can be used for deposit and for settlement. In the future, more currencies will be used for deposits.
(File photo: VCG)
Foreign media has given positive comments. "The contract is the first Chinese futures product that can be traded by overseas entities without a presence in China, representing Beijing's latest step towards financial opening and to promote global use of its currency, " according to Financial Times on Monday.
"The launch of China's yuan-denominated oil futures will mark the culmination of a decade-long push by the Shanghai Futures Exchange (ShFE) aimed at giving the world's largest energy consumer more power in pricing crude sold to Asia." Reuters said last Friday.
China's crude oil futures will be fully introduced to foreign traders and overseas brokerage institutions, quoted at a net price that does not include taxes, and foreign exchange can be used as a futures deposit.
Crude oil futures are priced and settled in yuan. The advantage is that the price reflects the CIF (cost, insurance and freight) price of imported crude oil, offering more convenience to domestic oil companies to manage price fluctuation risks. It provides effective risk management tools for domestic oil companies.
At the same time, China's crude oil futures will make up for the gap between the existing international crude oil pricing system and establish a benchmark for crude oil pricing that reflects the supply and demand relationship between China and the Asia-Pacific market. It will also help form a new pattern of full opening of financial markets and provide more market opportunities for global investors in China.
The biggest feature of China's crude oil futures is the start of crude oil futures trading, which is denominated in yuan and can be converted into gold. It will impact the dominant position of the US dollar in international crude oil trade settlement.
The world's two most important benchmark crude oils—Brent crude oil and WTI crude oil—are denominated in US dollars.
As China's crude oil imports catch up with the US, the demand will drive new futures denominated in yuan. The contract will become the third largest crude oil benchmark in the world.
Listed crude oil futures can better serve the high-quality development of China's real economy, business insiders said. It can provide effective risk management tools to domestic oil companies, with price references for industrial value chain companies. It also helps form a fully open up financial market.
Competing for oil dollar hegemony is not aligned with China's strategic plan for development.
The launch of international crude oil futures sets up a price system that reflects the supply and demand relationship between China and the Asia-Pacific oil market, serving the real economy of both China and the Belt and Road Initiative (BRI) countries while reining in financial risks.
Even though China's introduction of crude oil futures is not aimed at the Sino-US trade war, it can indeed improve China's confidence in the negotiations with the US.
With an annual consumption of 610 million tons and oil import volume of 420 million tons, plus nearly 70 percent of the dependence to foreign trade for oil, China has already become the world's largest importer of crude oil and the second largest consumer of crude oil. That means a huge industrial value chain and consumer system worth more than 6.5 trillion yuan ($1.03 trillion).
Crude oil futures is China's first comprehensive futures variety that is open to overseas investors. There are four major models for foreign traders to engage in energy transactions: to engage in the transactions through agents of domestic futures companies; through overseas intermediary agencies, which commission members of domestic futures companies or overseas special brokers to participate in transactions; through overseas special brokerages and to apply for direct transactions as a special offshore non-broker participant.
Investors are supposed to understand the aspects of bonded supervision, inspection supervision, foreign exchange management, taxes, and bills involved in the policy, to better complete the delivery.
Developing China's crude oil futures
Analysts have given suggestions for the sound development of crude oil futures in China.
Above all, we need to bear in mind that China's crude oil downstream industrial chain is very developed. It is conducive to the development of China's crude oil futures.
Second, to ensure the fairness of each entity's transactions and improve the accuracy of the price discovery mechanism in the futures market, it is necessary to open up to the scope of futures participants and reduce the restrictions on crude oil major institutions participating in crude oil futures.
Third, China needs to avoid changing trading rules to regulate the market, ensure the continuity of trading rules, and develop the enthusiasm of international investors.
China's futures industry is taking crude oil futures as the starting point for its journey of 'go global'. The crude oil futures market serves as a "navigator" for the opening up of the commodity futures market, accumulating experience in opening up roadmap, taxation management, foreign exchange management, bonded delivery, and cross-border regulatory cooperation. China's full opening-up in the commodity futures market could gradually expand into iron ore, non-ferrous metals and other mature futures varieties.
The price of SC1809 contracts started at 430 yuan per barrel and closed at 424 yuan per barrel, which is 2.3 percent lower than the benchmark price.