ANALYSIS: Key obstacles and opportunities for foreign access to China’s commodities market

Xiaoyu Chen, head of international department II at Nanhua Futures, said that the primary obstacle for overseas investors participating in China's futures market is unfamiliarity with the onshore regulatory framework.

“China's futures market has unique characteristics in terms of trading mechanisms, risk management systems, settlement processes and disclosure requirements,” said Chen.

While China's futures market is currently at a critical stage of institutional opening-up the complexity and differences in regulations have not been eliminated.

“Overseas clients need to understand China's futures laws and regulations, exchange business rules, margin systems, price limit mechanisms and large position reporting requirements,” said Chen.

For example, to open an account, overseas institutions must complete suitability assessments and “look-through reporting,” meaning the exchange needs to make sure it is able to see who’s behind the screen doing a trade and the control relationships.

“For overseas institutions that are unfamiliar with the Chinese market, this is a considerable entry barrier,” said Chen.

He added that overseas investors have varying needs across different service areas, including fund deposit, trading and market delivery, requiring service providers such as brokers to have comprehensive service capabilities.

China's futures market offers overseas participants two structurally distinct access pathways: the Overseas Intermediary regime, where specific contracts are directly open to overseas entities, and the Qualified Foreign Investor (QFI) regime, which allows access to a broader product range under regulatory conditions.

Chen believes that the coexistence of these two pathways increases learning costs and compliance complexity for overseas institutions.

Choosing the right pathway depends on the type of contracts traded, investor qualifications and trading purposes.

“The two pathways differ in account management, fund transfers, tax treatment and delivery arrangements, meaning overseas institutions must plan their pathway and prepare compliance documentation before entering the market,” said Chen.

For institutions that need to trade both specific products and QFI-eligible products, it may be necessary to establish separate operating systems across both pathways.

Delivery is the terminal link in futures trading and the most operationally challenging aspect for overseas investors participating in the Chinese market, according to Chen.

In bonded delivery, China has implemented a legal framework allowing futures delivery to be completed while goods remain in bonded status, with tax liabilities arising only when physical goods are exported or enter the domestic non-bonded zone.

“While this system reduces participation costs for overseas enterprises, the generation, transfer, cancellation and customs declaration of bonded warrants are all items that new participants must familiarise themselves with,” said Chen.

The Zhengzhou Commodities Exchange has created a truck/railcar/plate delivery system that aims to address PTA overseas trading delivery pain points.

“While this is an innovative system, overseas brokerage institutions face restrictions when participating in non-standard exchange for physical settlement and bonded warrant transfers for PTA products,” said Chen.

For instance, they’re unable to negotiate prices independently and are required to transfer at the settlement price of the nearest contract on the previous trading day.

Another major challenge for overseas investors participating in China's futures market is the inefficiency of foreign exchange (FX) management and cross-border capital flows.

“For overseas institutions participating in the Chinese market across multiple products and channels, FX fund management must simultaneously satisfy the multiple constraints of exchange rules, foreign exchange regulations and internal risk control requirements,” said Chen.

Issues such as approval procedures for cross-border fund transfers, management of exchange rate risks and conversion efficiency between different currency margins all affect the participation experience and capital utilisation efficiency of overseas investors.

From a talent perspective, Chen said that China's futures brokerage business has long faced a landscape of numerous institutions, low entry barriers and a highly saturated market.

“Homogeneous competition combined with vicious price wars has trapped the industry in a ‘rat-race’ development predicament,” said Chen.

In an industry that is characterised by high trading volumes, changing investor structures and rapidly growing futures firms, the talent market suffers from severe shortage and structural imbalances.

Looking ahead, Chen said that the opening up of China's futures market has moved from a "pilot exploration" phase to a "comprehensive acceleration" phase.

“The positioning of overseas investors is undergoing a profound transformation — from short-term traders to long-term allocators, and from single-purpose speculative participants to diversified industrial clients, asset managers and long-term institutional investors,” Chen added.

In terms of business model innovation, Chen said that futures brokerages can focus on commodities and derivatives to break free from homogeneous competition and build differentiated advantages.

For Nanhua Futures, this means expanding its global business systems by developing global teams with practical cross-border operational capabilities.

“The bridging role of futures firms is becoming increasingly prominent — connecting China with global markets, serving both domestic industrial clients going global and overseas institutional investors coming to China,” said Chen.

As Chinese enterprises go global, Chen said that they face risk management needs, including overseas raw material procurement, product pricing and exchange rate fluctuations, all of which are translating into sustained momentum for the internationalisation of the futures market.

From this perspective, the establishment of overseas delivery warehouses is a key institutional innovation.

“Allowing Chinese enterprises to lock in raw material prices and complete physical delivery directly through the futures market at their overseas factory locations solves the raw material price risk management challenges faced by enterprises after going global,” said Chen.

Overseas delivery warehouses, combined with domestic bonded delivery services, further amplify the capacity to serve industry, providing industrial chain enterprises with the same price discovery, hedging and physical delivery services available domestically.

According to the China Futures Association's latest figures, June trading volume for all futures exchanges reached 939,261,565 contracts and Rmb 80.6 trillion (£8.9 trillion) in trading turnover, representing a year-on-year increase of 27% and 52% respectively.

Avelacom has completed a series of optimisations in Shanghai aimed at supporting China onshore and offshore trading, FTSE China A50 strategies, and cross-market commodities arbitrage, as the country's financial markets become increasingly integrated with global trading flows.