China-futures-markets

Futures markets-China

With technical support from the Chicago Board of Trade, China opened a futures market for wheat in Zhegzhou in October 1990, and for rice in Jiangxi, Wuhan and Anhui: for corn in Changchun; and for peanuts and peanut oil in Shandong. These markets are intended, by the Chinese government, to serve several purposes; first they give farmers and firms an opportunity to hedge against the risk of future prices changes, second, they ameliorate the traditional problem of the farmer who has to sell his crop at harvest time, when prices are very low, and then watch the merchant hoard the grain and sell it for very high prices later.

Establishment of the agricultural futures markets encountered several problems in China. Throughout Pacific Asia one of the greatest sources of instability, and of reaction against the spread of the market economy, has been the uncertainty introduced into peasant lives by rapid changes in the price and availability of rice. Year-to-year price changes can deprive huge numbers of subsistence farmers of their margin of livelihood. Seasonal price changes can also be politically destructive.

This is the reason why even today the indonesian government carefully controls rice prices; China has been more audacious, and by the end of 1992 had freed grain prices for more than 200 million people. In 1992 Shenzhen set up the Shenzhen Metals Exchange and Shanghai set up the Shanghai Metals Exchange. Shenzhen began trading contracts for future delivery of aluminum, and planned contracts in coper, zinc, tin, lead, nickel, antimony and magnesium. The Chinese authorities permitted trade in US dollars, so that, when foreigners are eventually allowed to participate, they will have no currency risk. Similarly, Nanjing has opened a Petroleum Exchange.

China's leading young bankers receive masters degrees in international finance from the school of their own central bank, taking classes primarily in the English language and learning almost exclusively from British and American financial textbooks. The Bank of China has fourteen thousand of its total twenty thousand employees assigned to Hong Kong, where the success of free capital markets is more dramatic than anywhere else in the world. Over the longer term, the financial reform provide intellectual and market infrastructure prerequisite to all the other economic reforms.

The Golden Age of Hong Kong

and Guangdong

"Hong Kong is the shop window. We are the factory floor"

Standard characterization of the Hong Kong-Guangdong relationship by senior government officials in Guangdong.

Since China's economic reform began n 1979, Guangdong, with Hong Kong management, finance, technology and marketing, has achieved an average annual real growth of over 12% from 1978 to 1990, 13,5% from 1991, and 19,5% in 1992.

The China's Guangdong-Hong Kong

Joint venture

In China, Before economic reform, Guangdong was one of the poorer provinces, starved of infrastructure investment by a Beijing leadership whose allegiances were firmly to the interior of China. Guangdong have even lost some infrastructure, removed and relocated to the interior by Beijing on the grounds that China's security required important national assets to be placed safely inland, far from a coast that was vulnerable to the imperialists.

China's Guangdong Income Growth

%Real Growth in National Income

Source: Guangdong Statistic Bureau; Hong Kong Trade and Development Council;

1980   13,7

1981   10,4

1982     9,1

1983     5,2

1984   15,6

1985   18,7

1986     1,7

1987   12,4

1988   16,2

1989     2,8

1990     9,5

1991   13,5

1992   19,5

Hong Kong had money, management talent, marketing expertise, worldwide networks and technology. Yet success was pushing wages and real estate prices so high that the territory was becoming uncompetitive in most of its traditional industries. Guangdong land and workers cost only about 10% of Hong Kong prices, but the province was desperately short of all the skills, money and technology that were Hong Kong's forte.

Hong Kong manufacturers set up factories in Guangdong, then discovered that the water and electricity and roads promised by local authorities were not really available and might not be for a few years. The early days of Deng Xiaoping's economic reform programme coincided with his efforts to reunify China by bringing Hong Kong and Taiwan back to the fold. Beijing proposed to Taiwan that Taiwan accept formal integration. Deng Xiaoping's offer to Hong Kong of 50 years of capitalism was based on a calculation that China could catch up with Taiwan economically in fifty years.

Beijing negotiated for the return of Hong Kong on the basis that the existing Hong Kong system would be continued until the New Territories lease expired in 1997 and an additional fifty year thereafter.

Beijing gave Guangdong special privileges to move faster in domestic reform and in foreign trade than the rest of China, and it gave a very flexible mandate for Guangdong's reforms so that local officials could proceed pragmatically.

This created the opening for the great Guangdong-Hong Kong joint venture.To ease the process of reforming and opening Guangdong, Beijing created a special economic zone called Shenzhen on Guangdong's border with Hong Kong.

Three times larger than Hong Kong, and with a mandate to liberalize far faster than the rest of Guangdong, Shenzhen was to be converted from a collection of backward villages and rice paddies into an industrial power centre.

Thus, Guangdong was to be an airlock through which China dealt with the outside world. Shenzhen would be Guangdong's airlock to Hong Kong, and Hong Kong the direct window to the outside world. The example of Hong Kong's success was to attract Taiwan. By the early 1990s, the economic integration of socialist Guangdong and capitalist Hong Kong was largely complete. Shenzhen had become a mini-Hong Kong with tall buildings, factories that saturated US markets with clothes and shoes and toys, streets full of Audits and Mercedes Benz, people wearing clothing with designer labels, and a surfeit of London and New York investment bankers.

Some 80% of investment in Guangdong came from Hong Kong. Half of Guangdong's industrial workforce (over 3 million out of 6 million) was employed by Hong Kong companies.

By 1992 Procter & Gamble was selling as much Rejoice shampoo as it could provide; after the United States, Guangdong Province was its second largest market. McDonald's restaurants also profited from the new prosperity in Guangdong; the average McDonald's in America has about 1,400 customers a day, but one in Guangdong set the world second with 14,123  customers in a single day. When 7-Eleven stores opened in 1992, the riot police had to be called out in to full battle gear to control huge crowds of customers. Another group that did well in Guangdong was the fishermen. The opening of Guangdong-Hong Kong trade has created a paradise for smugglers, and the most lucrative thing to smuggle has turned out to be cars, especially Mercedes Benz, BMW and Lexus. They smuggle cars in extraordinarily fast boats, built by the Chinese People's Liberation Army. In all of this, the fishermen have the expertise and control the landing sites, so there are many millionaires among Guangdong's fishermen. For Hong Kong, China's economic growth has brought living standards higher than much of southern Europe. Hong Kong people own more Rolls-Royces and Mercedes Benz 500 per square kilometre than anywhere else in the world. Hong Kong shops pay the highest prices for retail floor space in the entire world - by 1992 surpassing even Tokyo's Ginz. In 1992 incomes were about double those of Greece and Portugal and just barely under those of Spain. Even this understates Hong Kong's real living standards, because income taxes there take only 16% of income, prices are lower than in most of Europe, and the Hong Kong dollar is undervalued.

Cognac manufacturers design super-expensive cognac brands especially for the Hong Kong market. Based on the strong local demand for luxury goods, a Hong Kong company, Dickson Concepts, has been systematically buying up Asian rights to many of the word's most famous luxury brands: S.T. Dupont, Harvey Nichols, Polo Ralph Lauren, Bulgari watches and many others. In half generation Hong Kong has lost its identity as primarily a manufacturer of cheap consumer goods and moved up market to become the services capital of Pacifica Asia. By 1991 most Hong Kong manufacturing had moved north across the border, and 83% of the Hong Kong economy was in the service sectors.

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