BEIJING, Dec 31 (Reuters) - China has cracked down on commodity speculators in recent months in a campaign to prevent rising food prices from pushing up overall inflation.
During the crackdown, China's big three commodity exchanges, in Shanghai, Dalian and Zhengzhou, have tightened up trading rules to limit speculation.
Those markets have only a small window to foreign participation. Financial institutions are barred from participating, and brokers cannot take positions.
Following are some questions and answers about the issue:
HOW CAN FOREIGN COMPANIES TRADE COMMODITY FUTURES IN CHINA?
All China-registered non-financial companies can apply for membership at the three futures exchanges in Shanghai, Dalian and Zhengzhou to trade for themselves as long as they also meet other criteria such as capital size and sound trading records.
A non-financial foreign firm can do so by setting up a locally registered company. Some international trading firms such as Louis Dreyfus and BP Plc are futures bourse members through their local entities -- Louis Dreyfus joined the Dalian and Zhengzhou exchanges in 2006, and in May 2007 BP joined the Shanghai exchange, which runs China's only oil futures contract, fuel oil.
Foreign companies with physical trading operations in China are also able to trade on the exchanges, and agricultural giants such as Wilmar , Cargill , Bunge , Louis Dreyfus and Toepfer are very active on the Dalian exchange.
Due to cumbersome red tape procedures, many global trading firms choose to open trading accounts at futures brokerages instead of applying for bourse membership.
Brokerage clients have to pay brokerage service fees and sometimes are subject to smaller holding ceilings than members.
ARE FOREIGN BANKS PERMITTED TO TRADE COMMODITY FUTURES DIRECTLY?
As China still has a segregated regulatory framework for its financial industry, the securities, banking and futures operations are separated by strict firewalls.
That means financial institutions such as banks, securities firms, mutual funds and insurance companies are banned from entering the commodity futures market without special regulatory approval.
The only exception granted thus far was in April 2009, when four domestic commercial banks got approval to trade gold futures in Shanghai as authorities moved to inject more liquidity into the newly launched product.
Banks and other financial institutions, domestic and foreign, are not allowed to become members at futures bourses or clients of futures firms.
SO CAN BANKS ACCESS THESE MARKETS INDIRECTLY?
Yes. A few banks, especially those with multiple business types, set up local non-financial firms in China, through which they become futures firms' clients.
For example, Wall Street bank Morgan Stanley , which runs a Shanghai office, set up a wholly owned foreign enterprise (WOFE) under a non-financial umbrella to trade metals and agricultural products, bank sources said.
A handful of foreign banks, such as HSBC Holdings Plc , Scotiabank, Australia and New Zealand Banking Group Ltd and Standard Chartered Bank trade cash gold in the Shanghai Gold Exchange.
WHAT OTHER AVENUES EXIST FOR BANKS TO GET A FOOTHOLD?
Chinese regulators are reluctant to open the domestic futures market to foreign players. Only since August 2005, when Beijing worked to cement business relationships with Hong Kong and Macau, have foreign firms had a chance to enter China's futures market to offer brokerage services.
Under the Cooperative Economic Partnership Agreement (CEPA) between the mainland and the two regions, a Hong Kong or Macau-registered firm can buy no more than a 49 percent stake in a Chinese futures brokerage. Foreign banks and futures firms can do so through their Hong Kong or Macau subsidies.
Since then, three joint venture futures firms have been launched: JPMorgan Chase teamed up with Zhongshan Futures in January 2008; France's Credit Agricole Indosuez teamed up with Citic Futures in April 2007; and Dutch bank ABN Amro joined with Galaxy Futures in December 2006.
Since January 2008, the process has been frozen and no more new joint ventures approved.
WHAT'S THE TIMELINE FOR OPENING UP THIS MARKET FURTHER?
China is under no pressure at all to open its futures markets, as unlike its securities, banking and insurance sectors, Beijing made no specific commitment to open its futures market when it entered into the World Trade Organisation in 2001.
The global financial crisis, as well as numerous scandals of Chinese firms suffering huge losses from trading derivatives overseas, will make Chinese regulators more cautious than ever. (Reporting by Chen Aizhu; Editing by Tom Miles and Ramthan Hussain)