History
Dalian Commodity Exchange (DCE) was established on February 28, 1993. Since the establishment, it been an important player in the production and circulation of mainland soybeans. Over the next decade of market ratification, DCE earned a reputation among investors for its financial integrity with prudent risk management and great market functionality in international price correlation, transparency and liquidity.
In the first few years after the introduction of commodity markets, new exchanges opened with wild abandon, and speculative volume ballooned. Soon a directive titled The Notice of Firmly Curbing the Blind Development of the Futures Market was launched.
In October 1994, the State Council rectified over 50 futures exchanges down to 15 futures exchanges, delisted 20 futures contracts (leaving 35), began issuing licenses to futures commission merchants for the first time while lopping their number by over 70%, restricted trading on foreign futures exchanges, introduced new rules and regulations, and shifted the control of the exchanges from local governments to regulatory authorities. DCE's market share then ranked No. 9 in China with Dry kelp as a pilot product. DCE traded soybeans and corn back then.
Continued abuse in the market brought forth the Second Rectification in 1998, most of the surviving 15 futures exchanges were restructured, and subsequently closed. Three national level future exchanges emerged: Shanghai Metal Exchange, Dalian Commodity Exchange, Zhengzhou Commodity Exchange. The number of futures contracts was cut back further to 12 from 35, and more brokers were closed, leaving just 175 standing from the early 1990s peak of 1,000. Margins were standardized and regulations further toughened. Trading on foreign futures exchanges was further restricted to a small number of large, global entities. Soybeans, soy meal and beer barley were traded at DCE.
The post-rectification Chinese futures exchanges are financially independent of any government body. On the one hand, that means they have to make do without the public subsidies of the hyper-competitive pre-rectification days (in fact they had to pay back investments made by the local governments), but on the other hand rising volumes and the more rationalized industry structure has kept revenues quite healthy.
On July 17, 2000, DCE restarted trading soy meal, the first product listed since the last tumultuous rectification of China's futures exchanges. Until 2004, soy meal futures had been one of the most rapidly developing futures contract at China's futures market.
On March 15, 2002, DCE started trading No.1 soybeans futures (Non-GMO soybeans). It quickly became the largest agricultural futures contract in China and the largest Non-GMO soybeans futures contract in the world half a year later. According to the Futures Industry Association, Dalian's soybean futures volume quickly became the second largest in the world. A cointegration relationship exists for Dalian Commodity Exchange and Chicago Board of Trade (CBOT) soybean futures prices.
On September 22, 2004, DCE started trading corn futures. On December 22, DCE started trading No.2 soybeans futures. According to FIA statistics of volume in 2004, DCE ranks No.8 among international futures exchanges.
On January 9, 2006, DCE started trading soybean oil futures.
On July 31, 2007, linear low density polyethene (LLDPE) futures are traded on the DCE. The introduction of LLDPE in 2007 marks the first petrochemical futures contract in the country.
On October 29, 2007, RBD palm oil futures are launched on the DCE to complement the current edible oil futures structure.
China's economy more than doubled in size in the past decade, turning the country into the world's top user of commodities such as copper, soy and rice. Though the government says it wants more financial instruments to help companies hedge risks, regulators aim to avoid a repeat of the 1990s, when speculation caused prices to soar and some contracts to fail.
According to Wang Xue Qin, a noted expert on the Chinese futures market and also the vice general economist of Zhengzhou Commodities Exchange, in theory, a new contract can be listed upon approval by the CSRC. In practice, the CSRC won’t approve a product unless a consensus has been formed by the State Council and almost any ministry or commission that has some interest in the product. For some products that means over 10 ministries and commissions have to weigh in before a new contract gets a green light.
Another aspect of the approval process that makes for cautious approval, if one were needed, is that regulators and others with some tie to the product demand from the exchanges a virtual guarantee of success. Unlike the western system where the exchanges are free to fail or look foolish, failure could mean loss of face and career risk for too many parties in China’s hybrid system.
According to the management, there will be more new contracts, pending from the favorable development in terms of types of products, market awareness and quality of participation over the coming few years, as futures are a key risk hedging component to an economy that is becoming more market-oriented and subject to global trade.
Read more about this topic: Dalian Commodity Exchange
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