Foreword
by Leo Melamed

Development of futures markets in China came late by international standards. It began in October of 1990 when the China Zhengzhou Grain Wholesale Market was established in Zhengzhou, Henan Province. By then every developed nation in the world already maintained futures markets in both agriculture as well as in finance.

But as in most fields of endeavor, China quickly began to catch up. Today there are four futures exchanges in China. Zhengzhou Commodity Exchange (ZCE, established in 1993), Dalian Commodity Exchange (DCE, established in February, 1993), Shanghai Futures Exchange (SHFE, established in 1999), and China Financial Futures Exchange (CFFEX, established in Shanghai in September, 2006). And very recently, in 2018, the INE Exchange for crude oil.

China’s growth has been an astounding success and deserves great applause. Since its adoption of market economics, China has demonstrated the ability to achieve incredible and unprecedented results in a short period of time. No other nation in the world has lifted more people out of poverty than did China in a matter of three decades.

However, given the complexity and sophistication of futures markets, and the fact that in China they are generally restricted to domestic trade, these markets are still a relatively unknown business enterprise by the Chinese public. This book by CSRC Vice-Chairman, Jiang Yang, will provide a better understanding of the value and immense contribution that futures markets make to the general economy of this nation. It is imperative that the Chinese public understand how and why futures markets fit into the continued expansion of this economy.

I have often spoke of the fact that during the Twentieth Century the world moved from the big to the little, from the vast to the infinitesimal. From General Relativity to quantum physics, from individual cells to gene engineering. Mankind entered an era where it could probe the fundamental components of nature. Indeed, parallel advances in physics, biology, and other sciences made it possible to examine elemental physical and biological processes and provided the capability to understand nature. Similarly, when advancements in computer technology were applied to established investment strategies, the result was remarkable. As we entered the Digital Age, intricate calculations and state-of-the-art analytical systems ensued, offering financial engineers the ability to divide financial risk into its separate components. Investment methodologies advanced from all-encompassing orthodox strategies to finely-tuned modern portfolio theories. We have moved from long-term hedging approaches to on-line risk management; from macro to micro applications.

In 1990, Nobel Laureate in economics, Merton Miller, named financial futures “As the most significant innovation of the past two decades”. He marked the launch of currency futures at the CME Group in Chicago, as the date that “Initiated the modern era of finance”.

One need only to take a quick look around the world to recognize that the application of futures markets are indispensable tools with which to efficiently manage risk. These instruments are used by the largest and most sophisticated financial institutions in the world — domestic and international banks, public and private pension funds, investment companies, mutual funds, hedge funds, energy providers, asset and liability managers, mortgage companies, swap dealers, agricultural producers and insurance companies. In other words, financial entities that face foreign exchange, interest rate, energy, agricultural, environmental or equities exposure use the futures markets to hedge or manage their price risk. A process that has improved national productively growth and standards of living.

Thus, nations around the globe have embraced the idea and followed the Chicago blueprint. Today there are developed financial futures markets aside from the US, in Australia, Brazil, Canada, France, Germany, India, Japan, S.Korea, Mexico, Singapore, United Kingdom, Argentina, Columbia, New Zealand, and of course China.

China has entered the transition period for economic growth. Its leaders have instituted a transformation process from an export dependent manufacturing economy to a consumption-driven economy, one powered by internal growth. As this transformation takes place, it is imperative to understand the role of futures in the development of capital markets. This book will advance this understanding.