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Third Chinese exchange opens futures contract to foreign players

Singapore — China's Zhengzhou Commodity Exchange Friday opened its first futures contract to international participation.

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ZCE's purified terephthalic acid futures contract is the third Chinese contract to be launched internationally in 2018.

The Shanghai International Energy Exchange or INE launched its long-awaited crude futures contract in March and the Dalian Commodity Exchange or DCE opened its highly liquid iron ore futures contract to international participation in May.

Overseas participants access these onshore "international" Chinese futures contracts through an Overseas Intermediary or OI. These are overseas brokers that have accounts with domestic exchange members, enabling them to trade and clear on behalf of overseas clients into Chinese exchanges.

Although all contracts are listed in Yuan, foreign participants are able to trade free of Chinese taxes using the OI route, and are able to US dollars as the initial margin.

China is dependent on imports of many commodities, including crude oil and iron ore, and has long said it wants to have more of a voice in the pricing of these imports.

By launching crude oil and opening up iron ore, China is trying to develop its exchanges as centers of international price discovery, with the eventual hope that prices discovered on these venues will give it more say in the price of commodities by becoming internationally accepted price benchmarks.

Therefore, market watchers said it comes as something of a surprise that the ZCE would choose PTA as its first contract to internationalize.

PTA IMPORTS ON DOWNTREND

Chinese demand for PTA, a feedstock used in making polyester, has seen significant growth over the last few years. However, a wave of investment in domestic PTA capacity has seen import volumes fall.

Platts Analytics data shows that China imported 655,000 mt of PTA over January-October. That is little more than 1% of the total market for PTA in China, which Platts Analytics estimates at 62 million mt in 2018.

John Browning, Managing Director at Bands Financial, a Hong Kong based futures broker and Overseas Intermediary, suggested that ZCE might be testing the waters by choosing PTA as its first contract.

"ZCE may be taking a gradual approach to opening up its contracts to the international community; in some ways it was quite brave of the DCE to start with iron ore," he said

Other sources suggested that it might be a competitive move by ZCE against DCE, which will launch MEG futures on its exchange on December 10. MEG is another intermediate, alongside PTA, used to make polyesters.

Nevertheless, overseas participants have showed interest in trading PTA in China.

Bands Financial confirmed that within two hours of the contract opening, it had executed a number of trades for offshore companies.

There are currently 12 PTA contracts listed on the ZCE that run concurrently from December 2018 through to November 2019. International participants are only able to trade contracts listed from May 2019.

On Thursday, May 2019 overtook January 2019 to become the mostly active PTA contract when 845,844 lots were traded.

With a lot size of 5 mt, this equates to 2.2 million mt of PTA. On Friday, 1,013,388 lots of May 2019 were traded, an increase of 20% from Thursday. Trading on July and August 2019 contracts also saw a significant gains Friday, rising 69% and 43% respectively over Thursday's volumes.

--Sebastian Lewis, sebastian.lewis@spglobal.com

--Serena Seng, serena.seng@spglobal.com

--Edited by Wendy Wells, wendy.wells@spglobal.com