* Two Chinese fund houses launch commods-focused funds
* 16 brokerages apply to set up asset management license
* Domestic funds pave way for opening up to foreign capital
* Market likely to see large inflow of capital
By Samuel Shen and Fayen Wong
SHANGHAI, Oct 11 (Reuters) - Two Chinese fund houses havelaunched funds focused on the domestic commodities futuresmarket as they look to tap into the burgeoning market thatregulators have cautiously opened to local financialinstitutions this year.
More than a dozen Chinese futures brokerages, which untilrecently were barred from investing directly into the futuresmarket, have also applied to set up funds that trade commodityfutures through a managed account product.
Their entry marks a significant change in the commoditiesfutures market in China, paving the way for the opening up toforeign investors and a large inflow of capital.
"One of the pre-requisites for the opening up of commoditiesfutures to foreign capital is for the market to establish acertain level of maturity and stability. So the move to letdomestic funds in is a step forward in that direction," said YeYugang, an analyst at Jinrui Futures.
"But the opening up to foreign capital will come in tandemwith the liberalisation of the yuan ... so it is possible thatthey experiment with having some foreign funds in by giving thema yuan investment quota for the commodities futures market."
China, which has for years set strict curbs to keepfinancial institutions and foreign capital from directparticipation in the sector, allowed Qualified ForeignInstitutional Investors (QFII) to invest in domestic stock indexfutures last year.
While China's futures industry may be only 18 years old, itscommodities exchanges in Shanghai, Dalian and Zhengzhou are nowamong the most liquid in the world.
Last year, the Shanghai futures exchange was the12th-largest derivative exchange in the world by volume,according to the Futures Industry Association, and the Zhengzhouand Dalian exchanges were just behind it.
Only five percent of investors in China's commodity futuresmarkets are direct producers and consumers, while the rest areprivate investors, the head of the Dalian Commodity Exchange hassaid.
The domination by speculators has led to large swings inprice and volumes, sparking concerns about threats to financialstability. A clampdown on speculative trading last year sawtotal trading volumes of commodities futures drop 34 percent to1 trillion lots, data from the China Futures Association showed.
LARGE CAPITAL INFLOW
Authorities would now like to see the share of hedgers andprofessional traders increase to curb the volume swings. That isone reason the China Securities and Regulatory Commission (CSRC)requires the managed funds to target only high net-worthindividuals.
"If more sophisticated institutions participate in thismarket, there would be increased liquidity and stability," saidGilbert Tse, executive vice general manager of Fortune SG FundManagement Co.
Globally, commodity trading funds have jumped sevenfold overthe past decade to around $315 billion, underscoring thepotential in China, Fortune SG said.
Fortune SG is partly owned by Societe Generale . Ithas launched China's second commodities futures investment fundin partnership with British hedge fund manager Winton Capital.
A joint venture between UBS AG and the parent ofthe State Development & Investment Corp was the first fund to beapproved to trade commodity futures in June.
Tse said he believed futures funds would become popular inthe long term as they could help improve Chinese investors'asset allocation and expand their investment channels.
The business could also create a new revenue stream forChina's futures brokerages, many of which are battling fiercecompetition.
Sixteen futures brokerages, including Yongan Futures,Zheshang Futures and China International Futures Co have alsoapplied to start fund businesses, according the CSRC.
"If the stock market keeps falling, alternative investments,including futures-related products, will become more popular,"said Li Yin, analyst at fund consultancy Howbuy.
(Editing by Clarence Fernandez)
Keywords: CHINA FUTURESFUND/