By Richard McGregor
Like most things to do with soybeans in China, the Dalian Commodity Exchange is doing record business.
The number of contracts and the volumes of trades in the oil seeds more than quadrupled in the three years to 2003, and have continued to grow rapidly this year.
The breakneck increase in demand in China for soybeans has risen in line with the country’s economic growth and, in turn, the increase in the quantity and quality of food consumption.
China is now the world’s largest agricultural commodity futures market and Dalian is its biggest exchange, with its volume of soybean contracts having overtaken the Chicago Board of Trade.
With a surge in local production and, more significantly, imports and crushing capacity, China’s soybean companies have had to use the futures market in ever greater numbers to hedge risks, the exchange said.
“China’s soybean processors and traders have become increasingly dependent upon the international market – hence a greater need to avoid risks, which has led to a jump in soybean transactions,” the exchange said, in written answers to a list of questions.
But Dalian’s growth is much more than a reflection of the need for hedging, said local and foreign traders. The exchange itself has been vigorously promoting its services, spending several million dollars on seminars and training courses over the last three years.
It has taken advantage of a central government decision in 2000 to ease slightly the tight rein it keeps on the commodity futures markets.
China has three exchanges – Dalian, on the north coast, which trades soybeans and soybean meals, Zhengzhou, in central China (wheat), and Shanghai (rubber, copper and aluminium.)
Dalian is by far the largest, with its contracts accounting for just over 60 per cent of the turnover in the three markets, according to figures supplied by the exchange.
By the end of 2003, Dalian had 197 members. Brokerages need a minimum paid-up capital of Rmb30m ($3.6m) for a seat, and non-brokerages Rmb5m.
The other drivers of growth are speculators, although the exchange has a strong interest in ensuring they do not get out of hand. The Beijing government has long been suspicious of futures markets and has tightly regulated them after a number of scandals in the 1990s.
China is particularly prone to speculative manias. With growing surplus cash, an illiquid local stock market and few other investment avenues, the commodities exchanges have been vulnerable to the entry of pure gamblers.
Dalian said speculators had been “playing a significant role” in the market, but in doing so, they bore “the risk of price changes and also increased market liquidity”.
Executives at foreign commodities houses said trading had been especially furious in recent weeks as local crushing houses, which are long on soybeans, had tried to force prices up.
One trader at the exchange, who declined to be named, admitted the market had been more speculative this year, but said it was “impossible for any institution or political group to manipulate prices in the long run”.
“Furthermore, the [Chicago Board of Trade] bears much stronger speculation than our market,” he added.
In some respects, the frantic trading of recent months is a natural reaction to the upheaval in the market overall.
Four bulk carriers have been turned away from Chinese ports by customs in the last six weeks, ostensibly because of fungicide in their cargoes, but in truth, say the foreign executives, because crushers do not want to pay the high prices they have contracted for them.
Dalian is working hard to gain acceptance and respect in the global commodities community. It is cultivating a relationship with the CBOT and signed an agreement late last year for training and information sharing. Their prices, the exchange points out, already correlate strongly with those of the CBOT.
Source: Financial Times