All Chinese Oil Traders Want for Christmas Is a Futures Contract

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(Bloomberg) -- Unlike Mariah Carey, all Yuan Quwei wants for Christmas is to trade oil futures on a Chinese exchange.

She’s among the mass of speculators that have pumped trillions of yuan into the country’s fledgling commodities bourses, trading in everything from eggs to iron ore futures with extraordinary intensity. She’s now waiting for the launch of China’s long-delayed domestic crude contracts, and hoping it’ll be in time for Christmas.

“Oil futures in Shanghai would be a very, very interesting product and I can’t wait for them,” Yuan, 48, said by phone. “An official launch during Christmas would be appropriate. The western market would be quiet and allow the Shanghai exchange as well as Chinese investors to adjust in the early days.”

Few derivatives have generated quite so much hype as China’s yuan-denominated oil futures. Mooted more than two decades ago and since postponed, shelved and re-born, they’re closer than ever to finally starting. For the first time, the world’s biggest oil buyer may open a commodity futures to foreign investors as it looks to wrest control over pricing from international benchmarks and promote the use of China’s currency in global trade.

The Shanghai Futures Exchange last week said a fifth round of testing had passed smoothly while the State Council was said to have given its approval for the futures to start, one of the final regulatory hurdles to listing. While they’ve never progressed as far before, there’s still no official start date, and neither the exchange nor the securities regulator will confirm when that may be.

A spokesman for the bourse referred to its Dec. 10 announcement that listing requirements have been met. Nobody responded to a faxed request for comment from the China Securities Regulatory Commission.

Quick Growth

“The Chinese oil industry wants to have a local hedging tool while financial institution investors look on Shanghai crude futures as an important product in their portfolios,” said Wang Xiao, an oil analyst at Guotai Junan Futures Co. in Shanghai. “Shanghai oil will be the first Chinese product that allows foreign investors to trade directly and such involvement will surely bring more volumes.”

Nickel was the last major commodity to be listed in China and is now one of the most heavily traded after steel and iron ore. Trading in Shanghai surpassed benchmark futures on the London Metal Exchange within about six weeks of starting in March 2015, bourse data show, though the amount of outstanding contracts at the end of each day -- open interest -- still remains far smaller.

Here Today, Gone Tomorrow

Across China’s commodities contracts, the dynamic between volume and open interest reveals much about the speculative nature of the country’s investors and the extraordinary pace at which they trade.

Dividing the average aggregate open interest at the end of each day by the aggregate volume shows the number of futures traded for every outstanding contract. Multiply that ratio by the number of hours in each trading day and you get an estimate for the average tenure of each contract.

For steel rebar, the most actively traded contract, it’s averaged 6 hours this year. Iron ore is 5.3 hours and nickel is almost 10 hours. By contrast, West Texas Intermediate crude on Nymex is held for an average 44 hours.

Unlike many of the retail investors who are seen to be behind the heavy volumes -- particularly in overnight sessions -- trading is Yuan’s day job. She quit her career as a property developer in 2007 and started investing from home in Chinese steel and iron ore as well as overseas oil and gold. She says she has increased her investment by about five times to more than 10 million yuan this year.

Evan Huang dabbles in derivatives when he’s not working as a finance manager in Shanghai and says he’s up about 30 percent this year trading rebar as well as zinc and copper. He says he and his friends are looking forward to the start of crude futures.

“We already trade overseas contracts, so when we have a domestic one, we don’t need to stay overnight or be bothered with currency exchange,” he said.

©2017 Bloomberg L.P.

With assistance from Alfred Cang, Jing Yang

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