China's Planned Crude Futures Contract May See Overseas Players - Source

The Shanghai Futures Exchange has proposed to the State Council, China's cabinet, to allow overseas investors to trade its long-awaited crude oil futures contract, a source close to the matter told Platts Wednesday.

"Besides domestic players, the contract is also designed to open to offshore players, including foreign companies which have not registered as legal enterprises in China and foreign individual investors," the source said.

SHFE expects the crude futures contract to become a global benchmark and sees allowing offshore players to participate as crucial to that.

It is also China's first attempt at injecting overseas investments into its mainland commodity markets since the 1990s, when the top securities regulator, China Securities Regulatory Commission, started banning foreign investors from the markets.

While awaiting approval from the State Council, the exchange is also in talks with the State Administration of Foreign Exchange (SAFE) on the matter, China Daily reported Wednesday, citing SHFE president Yang Maijun.

If the proposal is approved, offshore brokerage companies and other institutional investors will be allowed to open accounts to trade the crude futures, while oversea individual investors can trade through brokers, the source said.

"Investors from overseas are expected to use US dollars as trading deposits. They will be allowed to exchange their trading profit or loss, which will probably be dominated in Yuan, into other currencies without applying a quota from SAFE," he said.

The exchange has yet to decide whether to trade the contract in Yuan or US dollars.

In November, the State Council approved the final version of futures trading regulations, which allows qualified offshore institutional investors to trade specified commodities on futures exchanges in mainland China. The rules have been in force since December.

Meanwhile, to attract more offshore investors, SHFE is in talks with the State Administration of Taxation on tax-free policies, the source added.

As yet there is no tax rule for futures investors from overseas in China. However, income tax, which is levied on the trading profits of foreign investors, could be imposed if they are allowed to participate in crude oil contract trading.

"Taxes will narrow overseas players' profits, thus discourage them from trading. Therefore, the exchange is talking to the taxation office about a tax policy that favors these investors," he said.

The crude futures contract, which is expected to be launched by the end of this year, will reflect crude with gravity of 32 API and 1.5% sulfur content.

It is designed for physical delivery at bonded storage.

China's total crude imports in 2012 rose 6.8% year on year to 271.02 million mt, or 5.43 million b/d, data from China's General Administration of Customs showed.