China launches its own contract on the oil

by Josephine Mason and Meng Meng

BEIJING (Reuters) – China will launch Monday its own market of futures contracts on oil, a major step in its efforts for years to weigh more on price-setting by competing with the two global benchmarks such as the Brent of the North sea and the light crude american.

This initiative of the world’s leading consumer of oil has attractions for the merchants of western, who should find it on the Shanghai International Energy Exchange (INE) high liquidity and opportunity for arbitrage between the markets (american, european, and asian.

The traders used to dealing with the Brent london or the West Texas Intermediate (WTI) in the u.s., however, are likely to be reluctant to venture into the chinese market, at least in a first time, because of the price-setting of the yuan, opening hours are shorter, market practices specific to China, and extended periods of closure due to holidays in china.

“The rules surrounding the methodology of trading seem strange to the trading houses of western,” says John Browning, executive director of Bands Financial, a broker based in Hong Kong and foreign intermediary registered on INE.

“They are going to have to get used to a different set of trading parameters, including the calculation of the initial margin, on rolling monthly, on the ratios of cancellations of orders, etc, Everything is very different.”

A MARKET THAT IS ALWAYS LATE?

Up to now, China has allowed more than 6,000 accounts of stakeholders, including those of its big state oil companies, and about 150 between them, including JPMorgan (NYSE:JPM) and various entities based in Hong Kong.

Among the factors that the traders are going to have to get used to is the shorter duration of the sessions in Shanghai, where the day is in three phases with the final section closing at 15: 00 (07: 00 GMT), just before the entry into action of London.

Even if an extension night is planned to extend the session until the first trade americans, that will end more than six hours before the re-opening in Beijing. This situation may force the traders to devote their morning to catch up with the developments of the european and american markets to the detriment of the setting of a specific course in Shanghai, warned several traders.

The foreign stakeholders might also be surprised by some of the practices of the chinese futures markets of commodities, where investors are not involved in a regular way, but choose rather some of the month to act because of cost structures are different.

This phenomenon could further complicate efforts to establish performance gaps between Shanghai, the Brent and the WTI, and thus to provide real opportunities for arbitrage.

APPETITE INDIVIDUALS

“This is a chinese market, with chinese characteristics,” sums up Albert Helmig, managing director of the consulting firm, Grey House and former vice chairman of Nymex, new york’s market of oil.

The obligation to perform the transactions in yuan could be seen as a risk factor because of the willingness of chinese authorities to control the flow of capital. These last do not hesitate, moreover, to intervene massively on the markets of raw materials when they deem it necessary.

China has, however, the potential to offer a vast liquid market. This potential is promoted by the appetite of retail investors for the huge chinese markets of derivatives on commodities, apples, iron ore.

In 2017, the cumulative value of trade derivatives on the steel in Shanghai, involving chinese investors has reached 4.400 billion dollars. This compares to more than 10,000 billion dollars of world trade in futures contracts on oil, the main raw material market.

With the support of its “majors” in oil PetroChina and Sinopec, the China think to succeed where the Dubai stock Exchange market has failed there are a dozen years in its attempt to compete with the Brent and WTI, respectively by Intercontinental Exchange and the Nymex, owned by CME.

Analysts also believe in his chances even if he will have to overcome initial reluctance.

“Launching a new trading platform is something enormously complex, so if the initial application for the contract is not very strong, this is not necessarily a bad thing,” says John Browning, of Bands Financial.

(With Tom Daly in Beijing and Henning Gloystein in Singapore; Bertrand Boucey for French service, edited by Véronique Tison)