China Seeks Oil-Pricing Power - Wall Street Journal (blog)

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A Chinese worker displaying the latest gasoline prices at a kiosk in Huaibei, east China’s Anhui province.

China is increasingly central to world trade in crude oil. But the No. 2 consumer of crude - 11.4% of the global total last year according to BP PLC figures  - is frustrated it doesn’t have a bigger role in a key aspect of the trade: the commodity futures trading that dictates market prices.

Beijing hopes to change that as it seeks what authorities call pricing power. China’s government has said for some time it plans to launch trading in crude oil futures, the commodity derivative contracts used to set benchmark prices for oil.  Authorities recently indicated the contracts could be launched as soon as this year.  Beijing hopes they will compete with the West Texas Intermediate futures traded in New York and London’s Brent futures.

A top China Securities Regulatory Commission  official on Saturday kept the talk alive. ”Even now, crude oil is fully geared up,” said Peng Junheng, the commission’s deputy director of futures. Mr. Peng, who was speaking on the final day of Shanghai’s Liujiazui Forum, offered no timetable.

He and other speakers on a panel about commodities made clear the reason China is eager to pursue crude oil futures trading: pricing power. ”A lot of work has to be done before we become a price setter for the world, which is our goal,” according to Mr. Peng’s translated comments.

The worry in China is that traders in other markets who may have little appreciation for economic dynamics in China dictate what China pays for commodities.

That has become a major issue amid a surge in commodity prices over the past decade. To provide a recognized Chinese price for commodities, authorities have worked hard to build credible commodity futures markets. There are now 28 products traded on the country’s markets. Trading volume has surged over the years, with a  particularly important contract on the Shanghai Futures Exchange in copper â€" a metal sometimes described as an economic bellwether.

Still, the markets have limits. To protect Beijing’s ability to control its currency, China’s futures markets are virtually closed to outsiders and its domestic traders don’t have easy access to international markets. Speculation from individual traders is rife. That makes its contracts less than credible as the global price for the agricultural, energy and metals products trade in China.

None of this was lost of the panelists Saturday, and several agreed that the more China’s currency system is relaxed, the more credible its commodity markets will become.

“The price that is found in the domestic market does not reflect global demand, aside from copper,” said Zhao Lei, president of Citic Newedge Futures Co., speaking about commodity futures in general. “That’s why China has hardly determined the price.”

Mr. Zhao cited a “price determination ratio” for China in crude oil of 9%, meaning that 91% of the price of oil is set by market forces unrelated to China. He said the figure came from research he had read and was unable to provide more details. But his point was echoed by other panelists, who said China doesn’t have enough power with pricing.

Where once China worried about how it would actually find supplies of commodities around the world to satisfy its people and growing economy, said Ma Wensheng, chairman of Xinhu Futures Co., the risk today is price. ”When the oil futures launch China will gradually increase its influence in the oil price setting, and I’m also confident this will help boost the Chinese economy,” said Mr. Ma.

â€"James T. Areddy; Follow him on Twitter @jamestareddy