Remarks by Leo Melamed
BOAO FORUM FOR ASIA
ANNUAL HAINAN CONFERENCE 2014
April 8-9, 2014
I am delighted and honored to speak at this impressive forum and present my thoughts about futures markets and their continued growth in the People’s Republic of China. I will try to cover three topics:
I. How did the Chicago Mercantile Exchange, now the CME Group, grow to become the largest and most diverse futures exchange in the world?
II. How did the CME come through the recent global financial crisis without any failures and without federal assistance?
III. What advice do I have for Asian futures markets, and in particular the Chinese financial futures markets?
Note: The following excerpt is from the remarks made by Leo Melamed as it pertains solely to the third segment, namely, the advice he offered with respect to Chinese financial futures markets.
Advice to Chinese futures exchanges
It is always a great danger for a foreigner to offer advice to a foreign country. However, I have two strong reasons to take this risk. First, I feel that I would fail in my mission today if I neglected to state my opinion on what I believe are imperatives for China to next institute. And, second, while I was not born in China, I have been a friend to China for a very long time. As most people here know, it was almost thirty years ago, in 1985, that President Li Xiannian honored me by paying a visit to the CME. President Li was the first Chinese Head of State to visit the United States. He came to see me directly after seeing U.S. President Ronald Reagan. That was a monumental happening. I believe President Li, in his visit to Chicago, the capital of risk management, was telling the world that China was ready to change its economic direction. Li’s visit can be viewed as a prelude to the new economic blueprint that was subsequently fostered by Deng Xiaoping. A blueprint which brought China overwhelming economic success.
Most important, ever since my personal meeting with Li Xiannian in Chicago, I vowed to advance the capital markets in China. I knew that the greatest benefit from futures and derivatives markets will flow to the people of China. Like Deng Xiaoping’s white cats and black cats they will catch “market mice” in order to allocate capital efficiently. They will act like a gigantic insurance mechanism that allows inherent market business risks---in agriculture, foreign exchange, interest rates, and equities---to be adjusted quickly, more precisely, and at lower cost. They will serve the local economy.
During the years that followed, I maintained a strong connection with Chinese leadership and Chinese futures markets. The CME has invested considerable intellectual and monetary capital in efforts to educate and assist the futures markets in China. The CME executed Memoranda of Understanding with the Shanghai Futures Exchange, the Zhengzhou Commodity Exchange, the Dalian Commodity Exchange, and the China Financial Futures Exchange. We have provided workshops and symposia. I was personally honored with an appointment to the International Advisory Council of the CSRC. We have instituted a continuous visitation program between CME and Chinese officials that has proved of great educational benefit to both our nations. The latest visit occurred at the end of last year when we hosted a visit for former Vice Premier, Zeng Peiyan and former Ambassador Zhou Wenzhong.
Most important, we have maintained a close dialogue with CSRC chairman Xiao Gang and vice chairman Jiang Yang. In this respect, I am particularly grateful for the opportunity to meet with Vice Premier Wang Qishan. We have had fruitful discussions over the years. In 2005, I discussed with him and noted economist Cheng Siwei, that it would be important to create a futures exchange for financial instruments. We held a special seminar for this purpose in Shanghai. A year later, on September 8, 2006, with approval of the State Council and authorization of CSRC, the China Financial Futures Exchange (CFFEX) was born. It began trading futures on the Shanghai Stock Index, the CSI 300.
I have often been asked why do I come here to offer advice? Perhaps I have some hidden motivation? Well, the creation of CFFEX serves as a direct answer. CFFEX was an instant success and is today among the most successful futures exchanges ever devised. In promoting its launch, there was no other motivation. It was the same motivation that prompted me and the CME over the past 10 years to offer advice to all of the Chinese futures exchanges. It is the same mission the CME and I carried out globally for the past forty years. Clearly, those efforts helped make the CME stronger, but they equally advanced the foreign nation involved. Expanding the universe of futures is beneficial to all futures markets. That mission is no secret and its results are no mystery.
I have personally lectured and advised financial markets in Brazil, France, Germany, Great Britain, India, Israel, Japan, Kuala Lumpur, Mexico, Russia, Singapore, South Korea, Taiwan, and even Ukraine. I actually helped launch the LIFFE exchange in London back in 1981, The SIMEX of Singapore in 1984, The Japanese Exchange in Osaka in 1986. It became a CME tradition. We are particularly proud of the collaboration between the CME and the BVM&F in Brazil in which we own 5% of their exchange and they own 5% of our exchange. We have together built joint technology and run order routing systems between our respective trading platforms. We host the Malaysian derivatives exchange, the Dubai Mercantile exchange which we own 50% of, the Minneapolis Grain Exchange, and the overnight Korean KRX futures marketplace. We have order routing and other forms of collaboration with the Mexican and Singapore exchanges, and we have cross-listing or product collaboration exchanges in Japan, South Africa and India. Our purpose and motivation is no different in China.
China’s remarkable growth during the past three decades---during its period of infrastructure development and rural-to-urban migration---was fostered in part by protection of its domestic economy and currency stabilization policies. It was the prudent thing to do. However, the pendulum has now swung to the other side. Keeping protections in place too long will lead to a lack of innovation, low productivity, and poor service and can hurt the development of the country. They can stymie progress.
In my opinion, it is now imperative for China to be more open to competition. Former Secretary of Treasury, Henry Paulson, recently wrote in the Wall Street Journal, “If China is to achieve its new economic model it must introduce competition into its economy.” I emphatically support this view. I believe your leaders understand this as well. President Xi Jinping said as much when he stated “Let the market play a decisive role.” This direction is evident by the proactive measures taken by the PBOC to internationalize the RMB and expand its trading band. It is evident in the unprecedented recent action of Governor Zhou Xiaochuan to liberalize interest rates on bank deposits within two years. It is evident in the creation of the Shanghai Free Trade Zone. Similarly, it is evident in moves by the CSRC to approve the continuous trading concept for gold, silver, copper, aluminum, zinc and lead futures--- although I personally prefer a technological solution for continuous trade. Of greater significance is the launch of bond futures, the preparations for an options market, and the founding by the SHFE, of the Energy Trading Center as a separate platform for the launch of domestic crude oil futures, a market in which CME advice has been significant.
Clearly, Chinese futures exchanges have done exceedingly well and I applaud their success. However, Chinese futures exchanges are still nearly completely domestic. They are insulated from world participation or international competition. More than 80% volume is from retail participation and dominated by speculation. As the world’s largest importer of many commodities, Chinese futures markets should be playing a major role in global price discovery. But they are not. Chinese futures markets should be used as one of the benchmarks for global pricing. But they are not. The reason is obvious. Until Chinese future markets become subject to cross-border interaction, the full value of the Chinese futures to the Chinese economy will continue to be limited. Allowing global participation will strengthen the exchanges, and help transition China to a nation of investors and not just savers.
To advance this objective, China must take some initial steps. As it is said, “Mo Zhe Shi Tou Guo He,” cross the river by groping the stone under foot. The CME is discussing the concept of an international platform partnership with China’s Futures exchanges--- just as we have achieved with many nations. Most important, we are discussing initiatives that will not change the jurisdictional authority of the CSRC or local regulators.
I will conclude with this memory. After the 2008 financial crash I came to China and met with Wang Qishan. I had made a speech called “Don’t blame the pencil.” The vice premier liked those remarks and approved. He understood that even the largest economy can make mistakes and learn from the experience. China had its bond moment in the 1990’s. It learned from it. It made China stronger. And when it was ready it, launched bond futures again. Because great nations have to move forward. It is now time for China to take the next step.
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