China's launch of cotton futures next week will have only a limited impact on the world market because a ban on foreign investors could crimp liquidity there, analysts said Friday.
The Zhengzhou Commodity Exchange will open futures trading on June 1 in the world's top producer and leading importer of cotton. Beijing prohibits overseas investors from taking part in its domestic commodities futures markets.
"That (ban) will definitely limit its direct impact on the world market," Carl Anderson, a long-time cotton industry economist at Texas A&M University, told Reuters by phone.
He and other brokers said the absence of foreign investors could lead to a dearth of liquidity there.
The contracts will be denominated in Chinese yuan per tonne, and each will be equivalent to five tonnes.
There will be one contract for each calendar month. Expiration is set for the 10th of each month, with delivery on the 12th.
Analysts said one distinct use for the new cotton contracts would be to provide arbitrage opportunities for China's cotton players.
"But this could be a slow process and it may take several years before the Chinese feel comfortable to open their cotton market in a meaningful manner, and for foreign investors to respond in kind," one said.
Market players said they were also closely monitoring demands by China's soy crushers to price their sales at its 10-year old Dalian Commodity Exchange instead of at the Chicago Board of Trade (CBOT). the world's biggest commodity exchange.
US cotton sources conceded the Chinese, who have become a major buyer of US upland cotton to feed the seemingly insatiable appetite of their textile industry, may extend their demands in soy into cotton by demanding that the fibre they buy be priced on their own commodity exchanges.
"There's going to be reluctance, there's going to be scepticism," said Mike Stevens of Swiss Financial Services in Mandeville, Louisiana.
Brokers said while some trading houses may go along with their Chinese customers and price cotton there, most will shun that step.
"Our merchants are comfortable with what New York does," said Anderson.
A trading house dealer put it this way: "It's really a comfort level. Many people here would rather deal with what they know. In China, you don't know the players and you'd be worried about losing your shirt."
Frank Weathersby of brokers Affinity Trading in Fort Walton Beach, Florida, said China's cotton futures will be helpful in the long run.
"The new exchange in China will complement what New York is doing and not really compete," he said, adding it would over time provide a hedging instrument for the cotton industry in that part of the world along with arbitrage opportunities world-wide.
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