China’s new copper futures add another card to global yuan deck

Such yuan-denominated products serve two strategic ends: they give global market participants another reason to use the yuan while also boosting China’s pricing power in key commodities markets.

“There is no reason why China, being such a big consumer, shouldn’t be the price-maker…and not the price-taker,” John Browning, managing director of Bands Financial, an international intermediary brokerage for Chinese commodity exchanges, said in a webinar this month.

The copper contract starts trade on Thursday on the Shanghai International Energy Exchange (INE), where China’s flagship international crude oil futures also trade.

Frederic Neumann, co-head of Asian economic research at HSBC, said two key requirements for international investors to use the yuan more widely were gradually falling into place.

The first is “availability of deep, liquid markets for financial products,” while the second is smooth convertibility of the yuan, on which Chinese authorities have taken “significant further steps over the past year to facilitate transactions,” Neumann added.

“Foreign investors ignore onshore trading opportunities at their peril,” he said in an email.

A Singapore-based trader who is watching the INE contract closely said China’s line-up of yuan-denominated commodity futures was starting to make it a formidable trading venue.

“We now have gold, silver, oil and international copper contracts in yuan. That should scare the dollar,” said the trader, who declined to be identified.

Busting benchmarks

China’s launch of its crude oil futures in 2018 sought to increase influence over commodity pricing and promote the yuan, whose internationalization is a longstanding policy objective.

While trading volumes for that contract have been impressive, especially this year, at just one sixth of the dollar-denominated benchmark Brent crude they are far from dominating the global market.

China’s weight in the global copper market, however, is much larger, accounting for about half the world’s usage.

The country’s emergence as the world’s second-largest economy has created an insatiable appetite for the red metal, which is used in everything from power to construction.

Booming imports this year have propped up prices on the 143-year old London Metal Exchange and the Shanghai Futures Exchange, the INE’s parent bourse, where domestic copper futures are traded.

An executive at a major copper supplier to China expects that “sooner rather than later, (copper) contracts will be in yuan and the INE price.”

Barriers to growth

However, even the most bullish projections for yuan-priced international commodities trade don’t expect it to take off for at least another five years.

Bands Financial’s Browning, who sees the INE copper price eventually becoming a regional benchmark, said strict currency transmission rules adopted after China’s 2015 market meltdown have yet to be rolled back, making cross-border currency flows more complex.

The INE copper contract will be settled in yuan but investors using an overseas intermediary will be able to use dollars for the initial margin, the collateral investors must stump up to trades the futures, albeit with a 5% haircut.

Analysts say China may need to further loosen controls and encourage free conversion of the yuan to help investors overcome concerns about trading.

“I think there would need to be quite a bit of regulatory reform, currency reform and probably the removal of capital controls,” said Caroline Bain, chief commodities economist at Capital Economics.

James Wang, head of sales and dealing at Singapore brokerage Straits Financial, said China’s strategic ambitions in developing a global benchmark price won’t be achieved immediately.

“We don’t foresee (this happening) in the next two-to-three years, but in 10 years onwards,” Wang said.

(By Emily Chow, Mai Nguyen, Tom Daly and Chen Aizhu; Editing by Shivani Singh and Sam Holmes)