Chinese exchanges are wooing international commodities traders in a bid to overtake longstanding benchmark prices — many of which are set in Europe and the U.S. — reflecting ambitious plans by the world's second-largest economy to expand its influence overseas.
In the last few months, Chinese exchanges have opened up the trading of derivatives products for a few major commodities to international participants.
Those include crude oil futures on the Shanghai International Energy Exchange, iron ore futures on the Dalian Commodity Exchange and palm olein futures on the Asia Pacific Exchange (APEX), the last being a new largely Chinese-backed exchange based in Singapore. Palm olein is a widely traded palm oil compound used in cooking and baking.
"Right now, China's market is more like a domestic market. We are [now] going out to internationalize China's futures market," said Eugene Zhu, CEO of APEX.
The APEX is not just an offshore exchange for Chinese futures participants — as the Chinese face capital restrictions on overseas investment. Instead, the exchange offers global investors a complementary product to the yuan-denominated palm olein futures already on the Dalian Commodity Exchange, Zhu said. The palm olein futures on the APEX, meanwhile, are dollar-denominated.
"There will be arbitrage opportunities and it will help to generate more volume for all the exchanges," Zhu said.
That is particularly as there is keen international interest in what moves the market in China, said Zhu, who previously headed the Dalian Commodity Exchange and the China Financial Futures Exchange.
Although palm oil futures are heavily traded on Bursa Malaysia Derivatives, palm olein futures have not taken off on the exchange as they were denominated in the Malaysian ringgit, which has suffered volatility due to political factors and the oil price slump in recent years.
APEX palm olein has been doing well since its launch, with tens of thousands, if not well over 100,000 lots traded each day since the product's launch. Bursa Malaysia pushed out its own redesigned dollar-denominated palm olein futures a day before APEX's opening, but that product is only seeing tens of lots traded daily.
Trading volumes on the APEX's palm olein contracts were looking good after just a week of trading and stood a good chance of taking off, said David Ng, a derivatives specialist at Phillip Futures in Kuala Lumpur.
Bursa Malaysia said it introduced its dollar-denominated palm olein contract to promote a "more inclusive trading community" that is in line with enhancing product diversity on the exchange, the exchange said in an email to CNBC.
A key difference between the Malaysian palm olein contract and APEX's is the requirement that the Malaysian product delivered can be traced to sustainable sources up to the crushing mills, said Bursa Malaysia.
Sustainability is an issue in the palm oil industry as the widely used commodity — produced primarily in Malaysia and Indonesia — is blamed for rampant deforestation and labor abuses.
The development of China's first offshore exchange came after the launch of yuan-denominated crude oil futures in March on the International Energy Exchange in Shanghai. Those futures have already witnessed rapid growth in participation.
Dalian Commodity Exchange also opened up trade in iron ore futures to global investors in May and the country has pledged to open more futures contracts to international players.
APEX also plans to rollout yuan-denominated contracts and is eyeing rubber and soy products, said Zhu.
Meanwhile, there is skepticism in the international trading community over the viability of Chinese yuan-denominated crude oil and iron ore futures due to the fact that the currency is not fully open to the world.
There's been heavy trading in the contracts, and that's been attributed to speculators, many of whom are retail investors instead of institutional actors.
Zhu, for his part, expressed little concern about the challenges faced by upstarts such as APEX.
Despite a host of concerns, the Chinese are betting that the country's large trading base will create a new market with strong liquidity, eventually attracting international players, and establishing new global benchmarks.
"Exchanges have the potential to change the investing behaviors of clients and changing these behaviors is a long-term process," Zhu said in Chinese.
The APEX chief made no secret that his exchange wants a role in helping China internationalize the yuan and contribute to the Belt and Road Initiative — a multi-continent investment regime meant to further Beijing's ambitions.
Commodities trading hub Singapore is diplomatic about how it can position itself against upstart contracts on Chinese exchanges. The Singapore Exchange already lists iron ore futures , and says it is exploring the introduction of steel derivatives.
Instead of positioning Singapore Exchange products as competitors to their Chinese counterparts, the island-state is instead pitching them to be complementary.
"Companies based in Singapore can seamlessly participate in both exchanges, strengthening our mutual linkages and connectivity. We hope to grow this partnership and there are many win-win opportunities here," Chee Hong Tat, a junior minister in Singapore, said in May about the opening up of Dalian Commodity Exchange iron ore contracts to foreign trade participants.
Vested parties were quick to focus on the differences between the products of the two exchanges. The Singapore Exchange, they said, has a wider range of derivatives products, and it boasts an institutional investor base. Dalian, meanwhile, hosts more speculative retail players.
"The companies who are participating in different exchanges, really, the liquidity is ready there for them to participate," said Ciaran Roe, global metals pricing manager at S&P Global Platts, a firm whose iron ore prices are used by the Singapore Exchange.
But China is determined to make its mark as a powerful producer and consumer of commodities. The country has argued against U.S. and European companies setting the prices of important goods.
At an industrial event in Singapore, Liu Zhenjiang, secretary general of the China Iron and Steel Association pushed for multiple global benchmarks to make prices fairer.
In particular, Chinese participants argue that, as the world's largest commodities importer, China should have a greater say in pricing — and not be compelled to trade at inconvenient hours.
"I have a dream. We trade in the daytime," Zhu said at the opening ceremony of the APEX platform, referring to benchmark prices of soy products on the Chicago Board of Trade now.