The China Securities Regulatory Commission (CSRC) Thursday approved cotton futures in the Zhengzhou Commodity Exchange.

This is the second new futures agreement approved this year, following CSRC approval of fuel oil futures for the Shanghai Futures Exchange in April.

Zhengzhou is expected to start trading of cotton contracts after completing the necessary preparations, CSRC, the securities and futures watchdog, said Thursday.

The exchange has already loaded on its website two types of cotton contracts it plans to use and will start a one-hour trial operation of the trading system today and next Monday.

Exchange officials have said all the technical preparation has been completed, though the timing of the launching of the operation is another issue.

China is the world's biggest cotton producer and consumer, with an annual output of around 5 million tons and consumption of 6 million tons. That takes up about one third of the world's total output and consumption respectively, according to official statistics.

In recent years, China's cotton imports have also been on the rise, so the fluctuation of prices in international market has had an increasing impact on domestic market and related businesses.

The promotion of cotton futures would be better for the price-setting and risk management functions of the futures market, a CSRC spokesman said.

Operating from a premise of strict risk control, China will gradually develop more commodity futures products that can help producers and consumers trace prices closely and enable the hedging of risks.

It is expected that the three futures exchanges in China will each launch one new futures product this year. That is also a sign of a warmer regulatory environment and the faster pace of innovation as the futures market recovers from years of adjustment.

Apart from Shanghai and Zhengzhou, in the north, the Dalian Commodity Exchange has also applied for a licence for corn futures and is still awaiting regulatory approval, exchange sources said.

The demand for new futures products, such as fuel oil, cotton and corn, is paramount among farmers and sales agents, who make use of futures markets to hedge risks brought about by price fluctuation, said Li Lei, research director of China International Futures Co.

Authorities often talk about improving farmer's incomes, and the development of futures contracts for agriculture products was one way to realize that, he said.

However, a major concern for the authorities is the control of the pace of innovation in the futures market and the risks brought about by speculation, which badly hurt the market in the mid 1990s and forced the government to take radical action, shutting down many exchanges and canceling many trading products in an effort to clean up the business.

Since that time regulators practically stopped approval of new futures products.

Even for the newly approved fuel oil and cotton futures, the exchanges still have to decide the most appropriate timing to launch the new products, experts say.

(China Daily May 21, 2004)