Emerging Impact of Chinese Commodity Futures Market on Domestic and Global Economy

• Author: Min Song,Zhiyong Tu,Liang Zhang
• DOI: http://doi.org/10.1111/j.1749-124X.2013.12047.x
• Published date: 01 November 2013
• Date: 01 November 2013

79

China & World Economy / 79–99, Vol. 21, No. 6, 2013

©2013 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Emerging Impact of Chinese Commodity Futures

Market on Domestic and Global Economy

Zhiyong Tu, Min Song, Liang Zhang*

Abstract

In this paper we construct a set of indices that capture the special features of the Chinese

commodity futures market for the period from January 2000 to December 2011 to analyze

the general properties of China’s commodity futures market. Using these indices we

investigate the risk premiums of Chinese commodity futures and verify that the commodity

futures can act as an effective diversification tool for Chinese asset management. It is found

that the commodity futures can hedge both expected and unexpected inflation in China, and

agricultural commodity futures are found to signal inflation 2 months beforehand. Finally,

we explore the relationship between Chinese and US commodity futures markets in the years

2000 and 2010, and find that their interactions strengthen over time. Our research reveals

an increasingly important role of the Chinese commodity futures market in both the domestic

and the global economy. Some policy changes are suggested in response to this trend.

Key words: Chinese commodity futures, property

JEL codes: G10, G11

I. Introduction

The global commodity markets have undergone profound changes over the past decade.

Commodities prices have been increasing, particularly those of crude oil and metals. Growing

numbers of institutional investors are including commodity futures in their portfolios as

part of the asset allocation, and the fast growth of the Chinese commodity market has

*Zhiyong Tu (corresponding author), Associate Professor, HSBC Business School, Peking University, Shenzhen,

China. Email: zytu@phbs.pku.edu.cn; Min Song, Professor, School of Economics and Finance, Hong Kong

University, Hong Kong, China. Email: fmsong@econ.hku.hk; Liang Zhang, HSBC Business School, Peking

University, Shenzhen, China. Email: leonardolzhang@live.com. We thank two anonymous referees for helpful

comments. This project was supported by the HSBC Financial Research Institute at Peking University.

80 Zhiyong Tu et al. / 79–99, Vol. 21, No. 6, 2013

©2013 Institute of World Economics and Politics, Chinese Academy of Social Sciences

attracted global investors’ attention.

China is a traditional investment-driven economy, and is well known for its huge

commodity demand (see Lu et al., 2009). The first commodity exchange in China, the

Shenzhen Metal Exchange, was established in 1991. In the following 4 years, more than 50

commodity exchanges were set up. Because of the immature market structure and regulations

in place, market speculation and manipulation were rampant, and, consequently, triggered

strict rectification by the government. After 1995, most commodity exchanges were shut

down and only three remained: the Shanghai, Dalian and Zhengzhou Exchanges. By 2004,

the market had been reshaped with more complete laws and regulations. After that,

government policy shifted from consolidating commodity exchanges to promoting commodity

futures markets.1

Table 1 provides some basic statistics for China’s commodity futures market. From

2004 to 2010, the number of listed commodity futures products more than doubled, increasing

from 11 to 23. The turnover and volume of commodity futures trading in 2010 were

approximately 15 and 10 times that in 2004, respectively. By 2009, the total trading volume

of China’s commodity futures market exceeded that of the USA, and ranked first in the

world, accounting for 43 percent of the global commodity futures trading volume (PBOC,

2010).

With the continuous introduction of more commodity futures, market openness (e.g.

the plan for oil futures to open to international investors) and more complete laws and

regulations, China’s commodity futures market is playing an increasingly important role in

the world. Table 2 lists all the commodity futures traded in China in 2012. They are included

in the indices that we will introduce in the following section.

In addition to the rapidly growing volume of the market, China’s commodity futures

market exhibits some unique features in terms of market microstructure: (i) the major

participants of Chinese market are individual investors, while in the international market,

institutional investors account for the largest trading volume;2 (ii) at this stage, the Chinese

1Xin et al. (2006) provide a detailed description of the historical development of China’s commodity

futures market.

2For example, in 2007, individual investors accounted for 90 percent of the total trading volume in the

Zhengzhou Exchange (according to Zhengzhou Exchange official statistics).

Table 1. Statistics of China’s Commodity Futures Market, 2004–2010

Source: Almanac of China’s Finance and Banking Editorial Office, 2011.

Year 2004

2005 2006 2007 2008 2009 2010

Number of listed products 11 13 16 19 20 23 23

Turnover (RMBtn) 14.69

13.45 21.01 40.97 71.9 130.5 227.0

Volume (billion, lot) 0.31 0.32 0.45 0.73 1.36 2.16 3.04