The State Council has given initial approval to trading in cotton futures on the Zhengzhou Commodities Exchange in Central China's Henan Province.

The arrival of a new futures product on the market follows hot on the heels of the approval of resumption of fuel oil futures in Shanghai.

Sources at the Zhengzhou exchange said the State Council had basically approved the exchange's application to trade cotton contracts and passed its opinion to the China Securities Regulatory Commission (CSRC), the futures and securities watchdog, which is yet to review the application details, decide when to grant the licence and let the exchange start trading.

"We have not yet received the formal notice from CSRC on the approval, so the application procedure is not completed yet," a Zhengzhou exchange official said yesterday.

But the exchange has already made all necessary preparations and would react quickly once the licence is formally granted, he said.

The exact date for the launch of the cotton futures has yet to be revealed.

And the official cautioned that this may not be so soon as some reports predict.

There had been speculation that the cotton futures would be launched in the second quarter of this year. But insiders say that the final decision is up to the regulators and the State Council, who will have to take the overall macroeconomic climate, such as price fluctuations, into account.

China's futures market, which started a revival last year after years of market restructuring, is eager for more policy support and product innovation.

The authorities approved the resumption of trading in fuel oil futures on the Shanghai Futures Exchange in April. But the fuel oil contracts have not been formally introduced so far, partially due to the incomplete preparation of the oil warehouse and adjustment of relevant transaction rules.

Fuel oil was the second new futures product to be approved by the Chinese authorities in almost six years. Before that, Zhengzhou launched high-quality strong gluten wheat futures last March, but this was only a supplement to original wheat contracts.

Experts said that the existing types of futures contracts, which remain rather limited, cannot meet market demand for hedging products.

But the authorities have sent out signals that the innovation and development of the futures market will be stepped up this year.

An indication of this future acceleration is that Yang Maijun, director of the CSRC futures department, has recently been traveling between Beijing and the three futures exchanges on a frequent basis.

He said CSRC encourages the exchange to launch new contracts.

Tian Yuan, chairman of the China Futures Association, estimated earlier this year that each of China's three futures exchanges would be able to launch one new product within the year.

The Dalian Commodity Exchange in Northeast China's Liaoning Province is still applying to trade corn futures, which have been discussed for years along with fuel oil and cotton futures.

An official at the Dalian exchange said it had not yet heard about any approval of the application from the authorities, but it would continue to actively lobby for this.

The pace of the new product launch is carefully controlled by the authorities, said Li Lei, research director of China International Futures Co.

Demand for new futures products like cotton and corn is high, as farmers need the futures market to predict price movements of the agricultural products and adjust supply according to market demand.

And the best ways of increasing the income of farmers is also a focus of the Chinese Government's work.

But the authorities also have to monitor the overall growth of the economy and prices. The battle to cool down the economy, which has seen overheating in some sectors, is also a priority during policy-making, said Li.

The authorities will try to keep the growth of the consumer price index, the barometer of inflation, rather moderate in order to curb inflation. But the imminent launch of cotton or corn futures would fuel further price growth, as both are currently in short supply.

(China Daily May 13, 2004)