I recently travelled to China to meet with officials that oversee China's futures markets, and I came away with a renewed appreciation for the importance of regular engagement with practical goals.
China's commodity futures markets rank among the world's largest in terms of both the volume of trading and the range of commodities that are traded. The success of these markets creates a tremendous pool of liquidity for Chinese and foreign companies that need to hedge their risks. But there's a problem – access to those markets is quite challenging for commodity traders and end-users in other parts of the world.
One example is lithium futures. Lithium has become a hot commodity in recent years because of its use in batteries that power electric vehicles. On my recent trip to China, I was astounded to see how EVs have taken over the automobile industry. China has more than 50 active EV manufacturers that produce 58% of the world’s electric vehicles. Nearly 60% of all car sales in China are EVs or hybrids with lithium serving as a central component in their production.
The Guangzhou Futures Exchange began offering futures on lithium in July 2023. According to the latest data, more than 100 million of those contracts have traded so far this year. It is the world leader for price discovery in this commodity.
But lithium futures have not been added to the list of contracts that can be accessed directly by overseas intermediaries. Consequently, even though the international financial center of Hong Kong is only 100 miles away from the Guangzhou Futures Exchange, most participants in the global supply chain for electric vehicles cannot use these contracts to hedge fluctuations in the price of lithium.
There are numerous other commodities that trade in high volumes on Chinese exchanges, including cotton, iron ore, plastics, steel, sugar and wood pulp. China ranks among the largest markets for these commodities, and producers and consumers all over the world look to these markets for information about supply and demand in the world's second largest economy. That underscores an important theme that is often overlooked amid the headlines about trade wars and strategic autonomy – virtually every modern economy depends on a complex network of supply chains that stretches around the world.
This is why FIA has long advocated for removing the barriers to global access to futures markets, and that was one of the main themes of my recent conversations with the Chinese authorities.
In late October, I attended the International Advisory Council of the China Securities Regulatory Commission (CSRC), the country's primary regulator of securities and futures markets. The council brings together former regulators, financial executives, investors and academics to advise the CSRC on modernizing its regulatory framework.
Our meeting in Beijing coincided with US President Donald Trump’s meeting with China’s President Xi Jinping in Seoul, South Korea, to finalize an agreement on trade, which both sides touted as a victory. It also came a week after the conclusion of the Fourth Plenary Session of the Central Committee of the Communist Party of China. This gathering of the inner circle of China’s Communist Party approved recommendations of the 15th five-year plan for the Chinese government.
All of these meetings were top of mind for both Chinese officials and IAC members during our two-day discussions, and I can report that the tone of our discussions was positive and pragmatic.
The IAC heard from several high-ranking individuals from within China’s government. They emphasized that China's capital markets continue to learn from more mature markets. Perhaps most importantly, they acknowledged that their markets do not have enough institutional participation. That type of participation is critical to ensure that futures markets have enough depth to support the efficient transfer of risk.
Offering practical approaches
During our discussions, I offered several practical suggestions to help the CSRC as it works toward opening China’s markets and promoting more institutional participation.
The first was continuing down the path of opening more products to qualified foreign investors. China has been steadily making progress in this area, and I felt a sense of openness to new products being open to foreign investors. In June, CSRC Chair Wu Qing suggested a goal of 100 products open for foreign investment in the near term. Immediately following his remarks, several of the commodity exchanges proposed another 16 products for listing, bringing the total to 91.
I also discussed the need to ensure legal certainty for market participants. This comes in many forms and includes further guidance on close-out netting from the CSRC. I highlighted FIA’s support for updating bankruptcy laws to confirm that futures qualify for close-out netting—a key safeguard for market stability. The CSRC seemed receptive.
And, of course, I encouraged China to make sure to engage in discussions about tokenization and stablecoins. These technologies are moving fast. If China aims for more open markets, it must adapt to global technology trends and integrate them thoughtfully.
Purposeful progress
China’s ability and willingness to focus on the long view stands in stark contrast with the Western world that craves instantaneous results.
China takes cautious steps with an eye on societal stability, but progress is being made. Looking back on my first meetings with the CSRC in the early 2000s to now, China has advanced their agenda of opening their markets with steady purpose. I am reminded of Deng Xiaoping’s description of “crossing the river by feeling for stones.” China will be pragmatic and intentional in opening its markets, but they will do so on their timeline because they believe it is in the best interests of China to do so.
Truly open and competitive Chinese markets could reshape global finance in ways few can yet imagine. We must stay engaged and learn from each other. These ties will ensure a more integrated and stable global economy that benefits China and promotes cross-border growth. Sounds like a pragmatic win for all involved!
