Honorable Deputy Secretary-General JIN Xingming, Chairman CHEN Quanxun, Chairman LI Yang, and distinguished guests:

Good morning!

It is a great pleasure for me to be here at the 14th Shanghai Derivatives Market Forum (SDMF). As a grand annual event for China’s futures industry, the SDMF has witnessed tremendous achievements in the development of China’s futures market over the years and played an important role in promoting innovation in business and the opening-up of the futures market. On behalf of the CSRC, I would like to express my congratulations on the successful convening of this forum and my welcome to all guests and friends attending this forum!

New progresses have been made in the reform and development of China’s futures market in recent years. Firstly, futures products and derivatives instruments have become more diverse. Since 2016, two commodity options have been launched and the existing listed futures and options products have reached 54, including 46 commodity futures, five financial futures, two commodity options, and one financial option, which largely covering key sectors of the national economy such as agricultural product, metals, energy, chemicals and financial sectors. Secondly, the size of the market has grown steadily along with a gradual improvement in the quality of its operation. From January to April of this year, China’s futures market has remained active, with the daily average open interest standing at 14.55 million lots, up 9.71% YoY; at the end of April, the total amount of funds invested in the futures market reached RMB 472.61 billion, up 7.06% YoY. Thirdly, a derivatives market system which covers futures and options, OTC and exchange trading, and domestic and foreign trading has begun to take shape. While futures exchanges have been providing a wider range of exchange-traded futures and options instruments, the risk management subsidiaries of futures companies are also leveraging their own professional strengths to provide enterprises with more refined risk management services by offering OTC options and forwards and other derivative instruments. The “insurance + futures” pilot program has achieved desirable results. Foreign investors are highly enthusiastic to take part in China’s futures market through their enterprises in China. The open positions of foreign-funded companies in some mature futures products have exceeded 10% of total open positions therein. Fourthly, the price discovery and risk management functions of the futures market have been further recognized. The futures market price has become an important reference for macroeconomic regulators in monitoring the functioning of the economy and a pricing benchmark for domestic and foreign trade. The China Commodity Composite Index (CCCI) prepared by China Futures Market Monitoring Center (CFMMC) according to China’s commodity futures price information is able to forecast the trend of future changes in PPI and CPI, serving as an important reference for China’s macroeconomic regulators in assessing the economic situation of China. Moreover, futures and options are increasingly becoming necessary risk management tools for the operation and development of enterprises, playing an important role in offering services to “countryside, farmers and agriculture” and propelling supply-side structural reforms.

Overall, China’s futures market has maintained a positive momentum of growth and continuously improved its functionalities. However, we should also recognize its gaps with the risk management expectations of the real economy. I would like to take this opportunity to share with you my views on how to make the futures market better serve the real economy through innovation.

In servicing the real economy, China’s futures market must address the following deficiencies:

First, industry participation is insufficient and market functions are yet to improve. Currently, there are over 500,000 large enterprises in China, but there are only about 20,000 industrial customers in the futures market, which means that a large number of enterprises have not directly participated in the future market. In 2016, the ratio of open interest in China’s futures market to China’ GDP was about 1%, while such ratio reached 70% in the US. The open interest in China’s futures market was about 0.8% of that of the US. The capabilities of China’s futures market to serve the economy have a long way to go compared with those of advanced markets, suggesting that there will be a tremendous room for the development of China’s futures market. Since their listing, soybean meal and white sugar options have recorded a daily average trading volume of 18,000 lots and 6,900 lots respectively, accounting for about 2.4% and 2.49% of total trading volume of futures contracts; and a daily average open interest of 60,600 lots and 27,700 lots respectively, accounting for about 4.02% and 5.16% of total open interest in futures contracts. These options are at the embryonic stage where careful nurturing is required and it takes time for them to perform their functionalities in the market.

Second, most products have the problem that nearby contracts are not active and active contracts are not continuous. Over the years, futures contracts for China’s agricultural products and some industrial goods have been active mainly in January, May and September (or October) and become largely inactive in nearby delivery months, without continuity in their prices. This problem has brought higher risks and trading costs to enterprises which engage in production and business operation on a continuous basis, when they enter into hedging transactions. In particular, it has greatly impeded some upstream and downstream enterprises from directly using futures prices for basis trading. As can be seen from relevant analysis, active contracts are not continuous mainly because nearby contracts are not active which results from the poor interconnectedness between the futures and spot markets. In addition to the spot market nature of some products, the incompatibility of the business systems of the futures market with those of the spot markets has contributed to such poor interconnectedness. With the deepening of China’s market-oriented reforms and growing needs of enterprises for risk management, the discontinuity of active contracts has significantly affected the effective performance of the futures market’s functions.

Third, short-term price fluctuations have occurred for many times due to significant market price volatility and some products’ poor liquidity. Given the impact of intense volatility in the prices of commodities in international markets and the deepening of China’s supply-side structural reforms, China’s commodity futures prices have become more volatile in recent years, posing significantly more risks to the operation of the market. After exchanges expanded their price limits for futures products, the market has still occasionally closed at a limit up or limit down price and even the prices of major commodity futures across the market have experienced short-term significant parallel movements. Funds invested in the market swiftly move between major asset classes, with a noticeable feature of rotating among asset segments, and there are both liquidity risks and external shock risks. In addition, the overall liquidity of the market for stock index futures and T- bond futures is not deep. Due to reasons such as erroneous orders and stop orders, some contracts have hit the price limit during intraday trading. A volatile market is unfavorable for the risk management of industrial companies.

We all know very well that China’s futures market has a short history of development and cannot develop sound market mechanisms overnight. However, faced with rare opportunities of the times, we must have strong senses of mission and emergency, accelerate innovation in business, optimize functions of the market, better serve the real economy and provide great support to supply-side structural reforms. Therefore, we must focus on the following priorities in respect to innovation in business and product:

(1) Accelerate market development and give play to the bridging role of leading companies and specialist agencies in promoting the interconnectedness between the futures and spot markets

China’s futures market has a weak foundation. The fact that many spot markets are underdeveloped remains a restricting factor for the development of the futures market. A large number of upstream and downstream enterprises with risk management needs have not participated in the futures market. This problem is attributable to not only the underdevelopment of the futures market, but also lack of funds and risk management capabilities among these enterprises. To enable theses enterprises to have their risk management needs satisfied without participating in the futures market, we must actively promote innovation in market model, encourage leading enterprises and specialist agencies to provide upstream and downstream enterprises with refined and individualized risk management services and, through futures trading, effectively hedge against market risks so accumulated.

Take agricultural products for instance, we have expanded the “insurance+ futures” pilot program, effectively facilitating the production and trading of spot goods. For farmers, price insurance has increased their planting enthusiasm, thus stabilizing planting areas and contributing to increase in their production and income. For insurance companies, as price risk is transferred through OTC options agreements entered into with risk management subsidiaries of futures companies, they are willing to underwrite the farmers. For the risk management subsidiaries of futures companies, by participating in futures trading to hedge against price risk, they can take advantage of their own risk management strengths to make a profit. Such reasonable risk transfer mechanism strikes a good balance of benefits for the three parties.

(2) Introduce more products and trading models and increase the risk management functions of the derivatives market

The CSRC is expediting the listing of crude oil futures and has been preparing for the listing of cotton yarn and pulp futures. The listing of new futures products such as live hog, apple and red date futures which support “countryside, farmers and agriculture” and have unique regional characteristics is also under study. While ensuring the stable operation of soybean meal and white sugar options, the CSRC will take steps to broaden the range of commodity options products and proceed with the preparation for the listing of stock index options.

We will also race against time to improve the existing trading mechanisms. The market maker mechanism has been introduced for financial options, soybean meal options and white sugar options. It is proved in practice that professional market makers have played a positive role in boosting much-needed market liquidity for certain futures products. All exchanges are pressing ahead to work on the adoption of the market-maker system for inactive futures contracts, with a view to ensure the proper liquidity and stability of the market and prevent sudden unusual movements in the intraday price.

(3) Further optimize the composition of market participants and encourage commercial banks and foreign institutional investors to take part in China’s futures market

Since the listing of T-bond futures in 2013, the market for T-bond futures has been in stable operation and their functions have become increasingly visible. During the wild swings of the bond market in December 2016 when credit bonds were difficult to sell, T-bond futures as a risk management instrument for the bond market played an important role in maintaining the stable operation of China’s financial markets. However, at present, most T-bonds futures market participants are securities companies and fund companies and commercial banks as the backbone of China’s T-bond market are absent from the market. As a result, the authoritativeness of T-bond futures prices and the depth of market liquidity are not enough and they cannot fully reflect the supply and demand in the market. In international T-bond futures markets, commercial banks are the most important participants. We are working with relevant authorities on facilitating the participation of commercial banks in the T-bond futures market, with a view to meet their risk management needs and maintain the safe and stable development of China’s financial markets.

As China deepens its reform and opening up, China’s financial markets accelerates its opening up to the world. As the most market-based and global market, the futures market should play a more prominent role in such reform and opening up. Having identified crude oil futures and iron ore futures as the specific products for which foreign investors will be introduced on a pilot basis, we are currently working with relevant authorities on improving relevant tax policies to ensure the explicitness and consistency of tax policies for foreign investors who participate in trading and delivery of these futures in China. In the context of acceleration of the opening up of China’s financial markets, we are working on plans to introduce foreign investors to financial futures in order to provide a good risk management venue for the opening up of China’s economy and financial markets. Further optimization of market participants will help reduce volatility.

(4) Enhance market supervision continuously to ensure the stable, orderly and healthy development of the market

A fair and orderly market is the foundation for the effective performance of the market’s functions and the continuous improvement of the market efficiency. The CSRC has recently promulgated the Guidelines on Further Enhancing the Frontline Supervision Functions of Futures Exchanges for Abnormal Transactions and amended the Measures for the Administration of Risk Supervision Indicators of Futures Companies, which have enhanced the frontline supervision functions of exchanges, added the function of exercising centralized “pass-through” management of accounts under de facto control and fund management products to the CMFFC and further clarified the risk control and customer management responsibilities of futures companies. We advocate and facilitate innovation in business, but we will never tolerate any attempt to evade supervision in the name of innovation for the purpose of gaining self-benefits and allowing money to make money, which will eventually lead to accumulation of asset bubbles and increase risks to the financial system. We will always maintain a zero-tolerance attitude against and firmly crack down upon all illegal activities.

Distinguished guests and friends, at the recently concluded Belt and Road Summit, General Secretary XI Jinping depicted a grand picture of the “Belt and Road” Initiative for the world. This is the most magnificent blueprint for a new round of globalization after we entered the new century. Under this vision, China will steer the entire course of its opening up, including the interconnectedness of roads, see routes and pipelines with the outside world; and will speed up its supply-side structural reforms, greatly increase new driving forces for economic growth, significantly expand domestic consumption, and substantially enhance the pulling force on the economic development of the Belt and Road countries. During this unprecedented new round of globalization, China’s capital markets, including the futures market, are well-positioned to play an important role. Let us look forward to the future with great confidence and work diligently to be worthy of our times!

Finally, I wish this forum a great success

Thank you!