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Government urged to ease price controls and promote competition
( 2002-02-22 09:19 ) (1 )

China's oil futures market could be re-launched this year, experts said, despite the opinion of some that the move must await the full liberalization of the oil sector, which is scheduled to happen in 2005.

"The establishment of an oil futures market is possible as early as the second half of this year, if the government loosens controls on the prices of some oil products and lets more companies have access to the market," said Yang Jingming, former president of the closed Shanghai Oil Futures Exchange.

"The resumption of an oil futures market as a market-orientated pricing mechanism is in line with the government's opening of the oil sector to break up the monopoly," Yang told China Daily.

Yang's remarks challenge doubts of some analysts who believe such a futures market is unlikely to take shape before the oil market is fully opened in 2005, in accord with the nation's commitment to the World Trade Organization (WTO).

They maintain that trading on the futures market is impossible as long as the production and marketing of oil products are dominated by the biggest two companies, PetroChina and Sinopec.

Tang Kejun, a spokesman for the Shanghai Futures Exchange, agreed with Yang, saying a fully competitive oil market is not always necessary for oil futures.

"We should not sit and wait for a perfect market mechanism before we start an oil futures market. The oil futures market itself could promote the reform in the sector, creating a competitive market," said Tang.

China closed the two-year-old oil futures exchange in 1995, when the government tightened controls on production, marketing and pricing of oil products.

Zuo Taihang, deputy-director of the Development Research Centre under the State Economic and Trade Commission, said the resumption of an oil futures market, which would allow traders to buy and sell contracts that offer a fixed price on a given date in the future, would help oil users fix the price to fend off the risk of price fluctuations.

"As a big consumer, China needs its own oil futures market to reflect domestic market conditions and to enhance China's influence on international oil prices," Zuo said.

Earlier in January, officials from the China Securities Regulatory Commission said fuel oil futures could be the first to be resumed because the fuel oil market is much more liberalized and less important than crude oil and refined oil markets.

Yang said if the government launches fuel oil futures, the big two, PetroChina and Sinopec, must allow some of their subsidiaries to market fuel oil products, instead of allocating and selling everything themselves, to get more players involved in futures trading.

The government should also stay out of pricing to create a more competitive market, Yang added.

"The major problems hindering the debut of fuel oil futures are that the big two control half of all sales, and that the government still controls pricing and imports to a certain degree.

"The futures market is senseless when price and sales have been already decided," said Yang.

At present, Sinopec and PetroChina supply half of the domestic demand for fuel oil, about 15 million tons, the other half being imported. The imports must be approved by the government.

Meanwhile, although the government has already given up pricing controls on most of the fuel oil, it still caps the price for fuel oil used for fertilizer production, which accounts for one-third of the total consumption.

Tang said if the government decides to push through with the oil futures, it will inevitably have to reform its current mechanism for pricing, marketing and management.