Jan 23 (Reuters) – China is set to offer domestic-listed, yuan-denominated liquefied natural gas (LNG) futures contracts as soon as next month, people with knowledge of the matter said, reducing importer reliance on the West when hedging against price moves.
The derivative product will be listed on Shanghai Futures Exchange (ShFE), said the people, declining to be identified as they were not authorised to speak to the media.
ShFE and the China Securities Regulatory Commission did not respond to Reuters requests for comment.
The bourse has long wanted to offer internationally accessible contracts to raise its global presence and challenge the dominance of foreign pricing benchmarks for major commodities such as nickel and LNG.
The aim is to reduce the need for Chinese firms to determine physical contracts using overseas prices while also creating a need for foreigners to trade on ShFE.
Moreover, at a time when U.S. trade policies have created unprecedented upheaval, being able to manage prices between domestic entities in a local currency enhances energy security.
Shipments of LNG to China, the world’s largest importer, slumped last year due to U.S. tariffs, weak industrial demand, and strong domestic and piped gas supply.
But global LNG output is set to jump this year, easing supply constraints prevalent since Russia invaded Ukraine in 2022. That could spur demand which in turn will keep prices in check, analysts have said.
As such, Chinese imports are likely to rise 12% to 76.5 million metric tons this year, according to Rystad Energy analyst Ole Dramdal.
PRICE DISCOVERY
China is the single largest purchaser of most commodities yet price discovery happens in other markets, said a senior executive at a global bank.
Cutting out dollars with yuan-denominated contracts tallies with comments from investment bank Morgan Stanley on Wednesday about U.S. policies creating a “multipolar world” and eroding the dollar’s status as the currency of trade.
Meanwhile, China will be able to nurture financial markets around LNG. With the new contracts being yuan-denominated, banks can commoditise the risk by issuing yuan-denominated LNG-linked loans, repurchase agreements and asset-backed securities.
China also hopes the initiative will help it challenge foreign pricing hubs, one of the sources said.
The largest LNG futures markets revolve around major physical hubs. Henry Hub in the U.S. and Title Transfer Facility in Europe serve as benchmarks alongside the Japan-Korea Marker (JKM).
International oil majors, Western traders, Middle Eastern exporters – whoever has a China position would be willing to participate in the yuan-denominated futures contract, analysts said.
To trade the contract, foreign companies would need to set up a China-based trading entity.
“China needs a benchmark that reflects its own demand and supply. JKM can’t do that as it caters mostly to Japan and Korea,” said a state gas trader involved in the contract discussions.
“We foresee long-term supplies to China, for instance, to factor in Shanghai contracts, rather than be heavily benchmarked to Brent oil.”
(Reporting by Reuters Staff; Editing by Christopher Cushing)
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