Opportunities with the Opening of China's Futures Market

On August 20th 2012, SMK, a financial research institute in China, released the latest China's Financial Market Investment Report. The report stated that: "China will introduce a slew of financial opening policies. Foreign capital will be able to enter China directly, and it will provide a huge opportunity for the U.S. and European financial institutions."

China's financial markets are full of opportunities, and they have always been a giant gold mine in the U.S. and European financial corporations. Unfortunately, China government imposes strict restrictions to keep the foreign capital out of its financial sector. Now, the new policies of China's financial reforms present huge opportunities for foreign capitals, and China's fast-growing futures market will become the No.1 choice of multinational companies. Recently, at the 37th annual conference of the International Organization of Securities Commissions (IOSCO), officials of the China Securities Regulatory Commission stated that: "China is working on drawing up regulations for the futures market. In the future, based on crude oil futures, China will further attract foreign financial institutions, increase the maximum proportion of the foreign shares in joint venture futures companies to 49 percent, and open the door of the futures market wider to foreign capital."

After more than 20 years development, China's commodity futures market has become the world's largest. So far, there are 29 exchange traded futures products in China, involving more than 10 commodities，and the total trading volume of China's futures market exceeded 300 trillion in 2011. It is stunning how fast China's futures market is growing, and its market size has reached a huge amount. Furthermore, because China's futures market is not completely free or fully developed, the wealthy classes in China are investing their money in the international futures market through all kinds of channels. One executive of a multinational financial corporation once said: "The opportunities to gain a firm foothold in China will not only bring profit to our Chinese subsidiary, but also gain huge amount of capital infusion for our headquarters in the U.S.. Therefore, the development in China will be our first priority in the coming year."

It is seen from the recent market news that, foreign capital has begun to infiltrate into domestic futures companies in China. JP Morgan Chase set up a joint venture futures company with Zhongshan Futures. The Dutch bank held shares in Galaxy Futures. Goldman Sachs also started to take shares in Qiankun Futures. Moreover, the applications of many foreign financial groups to hold shares in Chinese Futures companies have been submitted to the Chinese regulatory department.

Due to policy restrictions, the maximum foreign share of joint venture futures companies in China is 49 percent. It largely restricted the dissemination of business and the spread of the brand image for foreign capital. Therefore, the international financial groups shifted their focus to a new field-the futures websites in China. Since the futures websites are not under supervision of the China Securities Regulatory Commission, there is no restrictions regarding the percentage of shares foreign capital can hold, and the foreign shares of futures websites in China can even reach 100 percent. Lately, some venture capital firms in the US have approached some futures websites in China to buy out the websites as an investment, but the proposals were turned down. It seems that the futures websites in China are looking forward to being bought out by multinational financial groups rather than by venture capitals.

It is known that the Futures Websites Alliance is the most influential futures website in China. It is composed of more than ten professional Futures websites, including China Futures-Money Management, China Oil Futures, Gold and Silver Futures, China Steel Futures, and Stock Index Futures, etc. These websites cover almost all exchanged traded futures products in China, and occupy a monopoly position in the internet field. Presently, the business model of the Futures Websites Alliance is working with domestic futures companies to provide its customers the account opening and trading services in futures. However, according to the person in charge of the website, in general, futures websites are not satisfied with their current operating situation. The websites are subject to the restraints imposed by the futures companies during their cooperation, and only a small amount of the profits from the customers goes to the websites. The websites company would like to break away from the current operating model and really develop into the most prestigious company in China's futures market, by cooperating with foreign financial groups. One financial journalist reported: "The Futures websites have ample customer flow, but they cannot really turn the customer resources into profit because of the lack of brand strength and high-end talent. The best direction for them to grow is merging with foreign futures companies."

Undoubtedly, under the depression of the global financial market, the opening up of China's futures market will present great opportunities for multinational financial corporations. How will the global financial enterprises enter and gain a firm foothold in this new market with huge potentials? It will be exciting to see.