Activity in China’s oil futures market has risen to record levels as the country seeks to develop the role of its currency in a trade dominated by the US dollar.
Open interest in oil futures on the Shanghai International Energy Exchange (INE), a measure of the total number of contracts outstanding, leapt to a daily average of 118,249 in 2020 — four times higher than in 2019. Trading volumes climbed more than 20 per cent year on year.
A rise in trading and positions in the contracts, which were launched in 2018, forms part of a longer-term push by Beijing to establish renminbi-denominated markets that ultimately seek to challenge the dollar’s dominance.
The new market “has done well beyond a lot of people’s expectations, including mine”, said Jian Yang, research director at the JPMorgan Center for Commodities at University of Colorado Denver. He added that the market could provide “potentially huge opportunities for promoting global usage” of the renminbi.
China is the world’s largest importer of crude oil — a role that has intensified thanks to the country’s swift economic recovery from the coronavirus crisis. Last year it imported a record 542m tonnes of crude oil, up 7 per cent from 2019.
But its oil futures market, which is vital for allowing investors to hedge against or speculate on price movements, is still dwarfed by dollar-denominated international benchmarks.
Renminbi oil futures traded on the Shanghai Stock Exchange launched in 2018, followed by contracts for copper in November last year that sought to rival London’s dominance in metals trading.
The establishment of its own commodities contracts has been a slow-burn priority in China for the past decade, but has gathered pace alongside financial market liberalisation policies pursued last year as foreign capital rushed to the country in the midst of the pandemic.
Last year, overseas purchases of Chinese bonds and stocks through Hong Kong programmes amounted to about Rmb1tn. In November, China increased foreign investor access to futures markets on the mainland, as part of reforms to its tightly controlled financial system.
Michal Meidan and Adil Imsirovic at the Oxford Institute for Energy Studies noted in a recent paper that the INE contract was still “far from being a benchmark”.
But they added that a near collapse in global oil markets last year had boosted the Chinese market’s appeal as increases in storage capacity encouraged established foreign traders to deliver more into China.
“As liberalisation of the Chinese energy market continues, delivered oil market in China will grow in importance and the role of the INE contract will increase with it,” they wrote.
Tom Reed, vice-president at Argus Media, said that some international hedge funds were exploring participating in the Chinese oil futures market. He suggested that the increase in activity was likely to be driven primarily by speculation, including by the country’s retail traders.
“It’s a financial market, but not in the sense that Brent is,” he said. “It’s somewhere for people to put their money and try to make profits from short-term [movements]”.