New futures regulations, which have been approved in principle by the State Council on Wednesday, have come as an early New Year's gift to the nation's struggling futures industry.

 

These new rules should boost the local sector by expanding the list of traded futures contracts to include financial futures and futures options.

 

The State Council also ruled to loosen the current tight regulatory regime, which has weathered a barrage of criticism for shackling the development of the futures industry at a time when a vibrant and innovative futures market is sorely needed.

 

Repeated delays in approving of the new regulations, which were expected much earlier, have shed light on the cautious approach the authority has taken. Nevertheless, cautiousness is understandable.

 

The chaos in the futures market in the early 1990s resulting from a loose regulatory framework and high-risk futures trading is a clarion call to both the regulator and industry players, reminding them that prudence is often needed in a volatile environment.

 

Furthermore, since financial futures trading is usually riskier than commodities trading, it is crucial that the authority takes a gradual and cautious approach.

 

Though coming late, the new rules will still help.

 

There are about 400 futures contracts traded worldwide, but only 13 of these are in China, dramatically curtailing the scope of a potentially dynamic market.

 

The tight regulatory framework and the limited number of futures products available are depriving Chinese enterprises of a range of tools, through which to manage business risks, and leave them vulnerable to a broadside from global price fluctuations.

 

China's local economy is irretrievably integrated with the world economy, increasing the risks from exchange rate and interest rate fluctuations.

 

Finally, the new rules will allow the introduction of financial futures products, hopefully paving the way for the launch of such contracts in the country.

 

(China Daily February 9, 2007)