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During the 7th CIOC, DEC President and CEO Liu Xingqiang accepted the media interview and answered relevant questions.
1. DCE has always strived to promote opening-up and cooperation. Up to now, CIOC has been held for seven times in succession. At present, what international impact do domestic futures varieties have and how do they function as price signals? Compared with major international futures markets, how to continue to improve the influence and functions of the domestic futures varieties?
Mr. Liu: Currently, DCE Has an Increasing International Impact on Markets.
First, the market trading size of DCE is steadily expanding, with its international status dramatically improved. In the nearly 20 years since the foundation of DCE, it, by regulating operation and steadily developing, has become an important futures trading center in China. Now there are nine varieties traded on DCE, including No. 1 soybean, No.2 soybean, soybean meal, corn, soybean oil, palm oil, LLDPE, PVC and coke. By the end of October 2012, its trading volume and value had reached 504 million contracts and CNY 25.49 trillion. According to the ranking of the major derivatives exchages in the world released by the Futures Industry Association (FIA), the trading volume of soybean meal in Dalian in the first half of this year is ranked first in agricultural product futures and options contracts.
Second, DCE’s international linkages have been gradually strengthened, with its impact on prices keeping expanding. DCE has become a market associated with international markets, and its futures prices are closely connected with those of relevant varieties in international futures markets. The correlation of the prices of No. 1 soybean, soybean meal and soybean oil futures with that of the corresponding futures on CME are all above 85%. The futures prices on DCE have an increasing impact on the international prices, and the relevant prices have become the benchmark prices of major global soybeans sale areas. The futures prices in Dalian is catching more attention of related soybeans and corn enterprises from the U.S., Japan, Brazil and Argentina, oil companies in Malaysia and Indonesia and petrochemical companies from Middle East countries, and have become one of the important foundations when overseas institutional investors analyse the global market supply and demand.
Third, domestic enterprises funded by foreign capital that participate in Dalian futures market have taken shape, and overseas investors show more interests. In 2012, there are 200 enterprises with foreign background participating in Dalian futures market, accounting for about 4% of the corporate customers on DCE, whose open interest of soybean meal and soybean oil accounts for around 20%. At present, there are 5 DCE members funded by foreign capital, including 3 futures company members. Such large companies like ADM, Bunge, Cargill, Louis Dreyfus, and Yihai Kerry, Leybold, TOEFL and other large well-known international grain and oil companies have become self-managed members or customers of DCE, which make hedging and arbitrage through Dalian futures market and have become an important force of hedging in Dalian market.
But what deserves our attention is that the landscape that the prices of bulk commodities in foreign markets influence the prices in domestic markets has not been changed, despite the fact that the scale and impact of China’s futures markets have expanded in recent years. It will therefore take a certain period of time to raise the voice of China’s futures varieties in the trading of international bulk commodities. We must, according to the requirements of CSRS, improve the reform and development of futures market to a new high, further increase its ability to serve real economy by continuously promoting the transformation of the development mode of markets, and raise the impact of the relevant Chinese commodity futures’ prices on actual transactions and international trade.
2. What innovation will DCE make in cooperation contents and forms apart from jointly holding oils conference, in terms of DCE’s cooperation with foreign exchanges?
Mr. Liu: On the side of cooperation with overseas exchanges, we have made a lot of efforts in recent years to strengthen information exchange and mutual visits and to explore business cooperation. The CIOC jointly held by BMD and DCE is a good cooperation form. This year, we will step up our cooperation with foreign exchanges, and up to now, DCE has signed cooperative memoranda of understanding with 19 foreign exchanges. By the end of this year, the number will exceed 20. There are a total of around 70 large exchanges in the world, and we have signed cooperative memoranda of understanding with nearly one third of them. Generally speaking, we have conducted a wide range of cooperation with international exchanges.
In terms of strengthening cooperation with foreign exchanges, we are making all-round researches and explorations into the promotion of market opening-up and increase the core competitiveness of exchanges. At present, Shanghai Securities Exchange, Shenzhen Securities Exchange and Hong Kong Exchange have obtained the approval of the state to jointly establish a stock company——“China Securities Market Services Co., Ltd.” It can be expected that more efforts will be made to open up domestic markets for more international institutions, more opportunities will be available to keep in line with international practice and to cooperate with leading mature international exchanges. In the near future, new forms will be adopted by futures exchanges to cooperate with foreign exchanges, which is an inevitable result of China’s reform and opening up.
3. By the end of October, the number of traded futures contracts of DCE this year has reached over 500 million on single side, an increase of 117% over the same period of last year, with the trading value up by 85.1%. What do you think leads to the above mentioned achievements? During the “12th Five-year” period, what strategies or measures will DCE take to achieve greater development?
Mr. Liu: The following reasons mainly cause the trading volume of DCE to increase sharply since the beginning of this year.
The first reason is weather. The drought in the U.S. this year and the reduction in the global soybean output result in the dramatic price fluctuations in relevant varieties on DCE. In terms of single side contracts, the daily trading volume of DCE on July 11 hit 7.95 million contracts, a record high, and in July there were five days with a daily trading volume exceeding 5 million contracts. The highest daily trading value was CNY 341.5 billion. The trading volume of July is equal to half the trading volume in 2005. The most typical variety is soybean meal, which is also the most active variety in the world as well. Why does soybean meal have more extraordinary performance? Because domestic trade companies treat soybean meal as a hedge.
The second one is economic factors. Great difficulties occurred in economy this year, but from the third quarter, signs of an upturn have appeared in the economy, leading to a rapid increase in the trading volume of coke. The trading volume of coke on DCE was several thousand contracts on single side in the past, but it rose to over 700,000 contracts in October, and the coke contracts were big ones, with each contract reaching 100 tons and its value over CNY 200,000. If the trading volume is more than 1 million contracts a day, the trading value will be over CNY 300 billion.
The third reason is system. In recent years, DCE has accelerated the modification and improvement of launched variety contracts and made them more market-oriented. The modifications to systems make futures trading more similar to actuals and meet the demands of actual market. Thet help enterprises and investors participate in futures market and facilitate the expansion of trading size, leading to an active market this year.
In the near future, DCE will continue to take measures to make the varieties reflect market demand and serve the industry. First of all, the existing contracts will be improved to fulfill the needs of producers and consumers. The delivery warehouse, for example, is set up for No.1 soybean in northeast, to help large grain producers sell grains and take advantage of futures market. Research is conducted into the innovation measures for cash delivery of No. 2 soybean, to increase activity. It will be very favorable to us if domestic soybean import enterprises are able to make hedge at home.
Second, new mechanism and measures will be taken to make existing varieties better meet the demands of market. Take corn, the annual yield of corn is nearly 200 million tons, but only northeastern corn can be delivered, due to the standard of trading objects. The corn sale areas in Sichuan and Hunan have a large annual consumption, but it is difficult for local market participants to do transactions because the trading object is northeastern corn. Some new corn contracts, therefore, may be set up to meet the demands of corn sale areas, to make more industrial clients participate in market and improve the chain of launched varieties to make them reflect real industrial status and meet market demands.
Third, variety series will be expanded to cover more varieties. The price signals provided by futures market have a great impact on enterprises’ production and management. In financial market, futures have a close relationship with industry and national economy. At present, many companies have no futures price for reference, and do not know what the cost of production is. Companies may participate in no-futures trading, but the price signals provided by futures are very important. Though 29 futures varieties have been launched at home, the coverage is not wide enough. More efforts should be made to develop varieties. Apart from bulk commodity varieties, the small and medium varieties should be taken into consideration, such as PP, fiberboard, plywood, timber, as well as milk, orange juice and fruit juice. Some varieties are small ones in China, but large ones in international markets. So we should develop new variety series, based on market demands.
4. What is the progress of coking coal futures products actively prepared by DCE and warmly expected by the industry to be launched in 2012? In addition, what is the preparation progress of hen egg futures and iron ore futures? What is their role in new product advancing and planning of DCE?
Mr. Liu: So far, the coking coal futures is waiting for final approval. We have made perfect preparation for earlier launching and trading.
For the hen egg futures, we have made completely improved contract design. Through primary examination by CSRC, we are applying for opinions from relevant ministries/commissions of the State Council. If all relevant ministries/commissions provide support to launching of hen egg futures, it is believed that the hen egg futures will also sooner acquire approval and go to the market within a short period.
Hen eggs are important animal faming products in China, accounting for about 84% of total output of poultry eggs. So far, the total output of poultry eggs in China is about 23 million, accounting for about 36% of the world. In recent years, average market scale is over CNY 18 billion. Per capita egg consumption each year in China is about 17.8kg. Hen eggs are one of the earliest commodities traded in international futures market. The United States started trading of hen egg futures in 1906. CME started with hen egg futures and butter futures. The current hen egg industrialization in China is more advantageous than that of the United States over 100 years ago. As a result, we are confident with hen egg futures. Since hen eggs are food for most people, launching of this product will help popularize futures knowledge. In addition, the launching of hen egg futures will accumulate experience and provide reference for development and marketing of other animal farming products, carry out beneficial test and exploration for establishment of perfect animal farming product futures risk aversion system. Poultry and pig futures varieties will also be gradually launched.
Iron ore is a strategic product closely related to national economy. Recently, CSRC has approved our application for the futures, and we are carrying out design and analysis of the contract. China is the largest iron ore importer and cash market of iron ores. Iron ore trading accounts for 60% of the total trade amount in the world. In 2011, apparent consumption of iron ore in China was 1.123 billion, including 686 million for import with over 60% of foreign dependency. By international iron ore pricing, one-to-one negotiation is adopted as a pricing means. Export trade of Rio tinto, BHP and CVRD as three major foreign ore traders claim 60% of the total in the world with a large pricing influence. The domestic enterprises generally have weak position in iron ore trade negotiation. So far, in consideration of the right to speak in corporate risk management and commodity, China shall launch iron futures as soon as possible.
Iron ore product plays an obvious and significant role for stable and healthy development of Chinese iron industry and national economy. Last year, National Development and Reform Committee commissioned the Exchange to carry out iron ore futures research. Last month, Final Report Meeting and Debate Meeting were held for iron ore research in Beijing. All experts, steel manufactures, traders and distributors and competent government agencies present in the meetings believed that we should lose no time in launching the product. It is agreed that earlier launching of iron ore futures will be more favorable than later. We are preparing for sooner launching of iron ore futures. Soon, we will visit key international traders and targets, delivery process, participating institutions, opening to the outside world and other topics on iron ore. We will work hard to make iron ore futures as a product in line with the international standards and with high opening degree.
In recent years, as the largest exchange, DCE has developed into a comprehensive exchange across many industries from a single farming product exchange. So far, we have formed a product system covering many industries. With more efforts, we will form six complete product systems within about two years. Specifically, the first is farming product system with corn and soybean as the symbols, the second fat and vegetable oil including soybean meal, soybean oil and RBD Palm Olein, the third plastic and chemical system, such as LLDPE, PVC and PP, the fourth coke, coking coal, iron ore and other minerals series, the fifth animal farming products, such as hen eggs, poutry, pigs, etc, the sixth wood products, such as Fiber board, plywood, log, etc. With diversification of the trading products, the futures market will play an increasing role in serving the industries and the economy.
5. It is key item to speed up development of modern agriculture in China’s “Twelfth-Five-Year” Plan Summary. According to the experience of the European and American developed countries, the futures of farming products have played an active role in encoraging the farmers to avoid price falling risk of farming porducts and enhancing nnn futyure market function. Please describe the actual plans of DCE in innovation of the futures and other products.
Mr. Liu: CSRC attaches much importance to research and promotion of futures. In recent years, DCE has been developing futures. The options, as commonly called in the world, is a very effective instrument for many enterprises and investors to use futures market to manage risks and increase wealth.
Options play an imortant role in agricultural development: firstly option trade can control future risks, improve operating quality of the futures market and efficiently disperse risks of the futures market; secondly, futures trade can manage spot risks and becomes a key instrument of the spot enterprise for hedging and risk prevention. More imortantlt, the farmers can improve actual income through options of nnn, avoide harm for pricing falling, promote healthy and stable development of the agriculture and enhance the role of nnn future market.
Options are very professional and complex in their design. DCE has attached much importance to research and promotion of the options and started relevant work in 2002. Through years of in-depth research and accumulationj, DCE have achieved much maturity and improvement in option rules, system design and trading system. Recently, to launch options to the market, DCE has send a group of 19 key employees to CBOE for learning and research of options launching. We hope that they, when back home, can sooner complete contract design and technologial system preparation for the options and put them in operation. For futures trading, settlement and matching, DCEshall complete interfacing with the option company and carry out training of options companies.
So far, we have launched stimulated trading and mock trading. Through the trial platform, we can improve futures contract and trading rules, test stability of technological system, accumulate option trading experience, cultivate futures investors and enhance option system construction of the members and information providers. In this May, on basis of full preparation and analysis, on approval of CSRC we took lead in starting mock trading of options and futures and achieved a great leap in preparting and launching the commodity futures and options. On September 24, we started the second stage of mock test engaging 12 members. It is planned to start option mock taining across the market at right time in 2013.
6. Among the top three commodity exchanges in China, the indusrty believes that DCE is most potential in completing stock-holding reform earlier than others. It is reported that you carried out such reseach during the last few years. Recently, with promulgation of The Twelfth-Five-Year Plan on Finnacial Development and Reform, do you have any new assumption on exchange system?
Mr. Liu: Company transformation of the Exhange is a trend of international exchange indusrty and also something we are promoting. So far, among the exchanges joining WFE, 70% have completed company transformation, and over one half have been listed in the market. Company transformation of the exchange has caused much impact on the market. On one hand, the exchange has been transformed from a place for pure trading to a supplier of financial trading service; on the other hand, it speeded up integration of international exchange industry and given birth to CME, Deutsche Bourse and other huge market aircraft carriers.
Domestically, though some exchanges have not started company system yet, China has company reform over the state-owned commericla banks and other financial institutions. Such successful reform practice provide important experience for reform of the exchanges. Meanwhile, the operation exploration of the branches under the exchanges has also strengthened our confidence in futures development.
The basic requirement of the Twelfth-Five-Year Plan on Finnacial Development and Reform is to “remarkablly improve real economy of financial service.” For futures market and futures exchange, the key of better service for real economy is to establish systems and mechanisms in line with the market demand. System is basis of the mechanism, while mechanism can better improve system.
For the existing exchanges, it is more urgent to establish market-oriented operating mechanism. With weak competitive strength, Chinese futures exchanges want more rapid institution and mechanism construction. Compared with maturer key exchanges in other countries, the domestic counterpartis still have much gap from the first-class international exchanges. Exchanges constitue a platform to service national economu and provide financial products. Financial institutions are providers of financial products, while exhanges are one of the providers of the financial products. Only with serrvice awareness can the exchanegs better play their role. The existing institution and mechanism of the exchanges have fell behind the neeed of market development. Path of reform is to adapt to the goal of market orientation.
As a direction, reform must encounter many problems. For 30 years of reform and opening up, China has achieved many success and accumulated much experience. For example, bank industry including many banks have been successfully restructured and listed in the market. Hardship of restructuring for an exchange will not be easier. Restructuring of an exchange needs improve governing and organing structure and establish new stimulus mechanism accroding to comprehensive arrangement of CSRC. The internal organization shall also follow the requirements of market orientation. All parties are advancing reform with a wider coverage. CSRC has formed special working group to promote restructuring of 6 exchanges.
7. For over 20 years of exploration and development, Chinese futures market is playing more and more an important role in development of national economy. However, against the current market development environment both at home and abroad, the futures market needs to expand its service to national economy in both width and depth. What do you think the actual performance is?
Mr. Liu: So far, Chinese futures market has achieved remarkable success and played more and more an important role in relevan industries and national economy. However, compared with international mature futures market, Chinese futures market has large improving potential in trading products structure, quatity, size, influence and other aspects, which does not match development of national economy and meet requirement of real economy development and change of economic development pattern.
Firstly, less listing products. Futures products consitute the basis of market function, i.e. one product serves one or more related industries. Quicker product listing and more perfect futures product system constitue the key of futures market and also the core issue for the current Chinese futures market. In an international maturer and emerging market, product innovation will mainstain vigorous energy for the flexible product listing mechanism. The listing quantity of Chinese futures market is equivalent to the level of the U.S. futures market in 1950 and less than one half of the Indian futures market. No futures trading is not available for crude oil, coal, etc. So far, listed by product quantity, Chinese futures market can only serve a limited number of indusrties.
Secondly, further improvement of investor structure. The investor structure is related to formation of commodity price and true effect and also the stable performance and sustainbale development of the market. So far, Chinese futures market structure has less investors and small size with individual investors as the key. Due to shortage of institutional investors, the turnover rate of futures products is generally low in China. Institutional invesors play a leading role in foreign developed futures market. For the intitutional investors in the United States, the U.K. and other maturer markets, the trading volume accounts over 70% of the total, which plays an important role for stable performance and function of the market. Therefore, positioned as a modern financial enterprise, we shall cultivate investor group with large institutional investors and institutional enterprises as the key and improve the investor structure with professional traders as the key.
