Challenges from WTO Membership
Advances in Chinese Economic Studies series
Edited by Kam C. Chan, Hung-Gay Fung and Qingfeng ‘Wilson’ Liu
Chapter 3: Futures Markets
Jot Yau INTRODUCTION With a growth of over 9.5 percent a year, China is one of the fastest growing economies in the world. With this growth rate comes a huge demand for raw materials and commodities. BusinessWeek estimates China’s share of global consumption in 2005 was 47 percent in cement, 37 percent in cotton, 32 percent in rice, 30 percent in coal, 26 percent in crude steel, 21 percent in aluminum, 20 percent in copper, 16 percent in wheat and 8 percent in oil.1 This huge consumption demand inevitably makes China a major importer in many commodities and contributes to the increasing demand and price volatility in the world commodity markets. For example, China imported 18 percent and 20 percent of the world output of wheat and aluminum, respectively, in 2004 (Table 3.1). China is the third largest oil importer and the second largest importer of wheat in the world. This great increase in demand puts pressure on commodity prices and inﬂation rates. The rising costs of raw materials and their volatility inevitably increase the cost of production for all manufactured products, which may eventually slow down China’s growth. Moreover, political upheavals in some commodityrich countries, new environmental regulations, and other structural changes in the global physical commodity and futures markets have all contributed to increasing price volatility. This makes hedging using various derivatives (that is, forwards, futures, options and swaps) indispensable for many sectors of the economy such as the airline industry, and strategically important for developing countries....
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