Foreign firms drive trade in Guangdong ETS as low liquidity haunts pilots

Published 13:46 on October 26, 2015  /  Last updated at 13:47 on October 26, 2015  /  China, China's National ETS, China's Pilot Markets  /  No Comments

Two foreign companies account for as much as 80% of the volume growth in Guangdong’s carbon market in recent months, a conference heard on Monday, with speakers identifying the main factors holding back liquidity in China's seven pilot schemes.

Two foreign companies account for as much as 80% of the volume growth in Guangdong’s carbon market in recent months, a conference heard on Monday, with speakers identifying the main factors holding back liquidity in China’s seven pilot schemes.

Since July 1, just shy of 5 million allowances have traded in the Guangdong ETS, compared to only 3.2 million in the first 20 months of the scheme, making it the second most liquid of the seven pilots.

“A couple of international investors have contributed a lot, 80% of the volume increase comes from them,” one source told a conference in Beijing, but could not be named as the event was held under Chatham House rules.

Three foreign firms are currently registered to trade carbon in Guangdong, two of which are BP and Shell. The identity of the third has not been released.

BP last week signed an agreement with China National Petroleum Corporation to cooperate on carbon trading.

Most of the foreign participation in the pilots so far has been centred in the Hubei scheme, but Guangdong – the biggest of the seven in terms of tonnage covered – is showing potential to attract interest from European companies, many of which are looking to establish a presence ahead of the 2017 launch of China’s national market.

The Guangdong scheme is struggling with low prices, however, amid claims of over-allocation.

Guangdong Emissions Allowances (GDEAs) closed Monday at 15.50 yuan ($2.44), roughly a third of the price level in Shenzhen. Only Shanghai and Chongqing have lower permit prices.

LOW LIQUIDITY

At the event, arranged by an EU-funded programme to support the design of the China ETS, market participants and experts identified some of the issues that have held back liquidity in the pilots, while highlighting the efforts to develop financial products to attract more investors.

“The fact that information on market balance is still so scarce is a major barrier,” one speaker said.

Several of the exchanges have launched various products to attract interest, including repos and swaps, but the response has been lukewarm.

“There is a lot of uncertainty around the shift to the national market, which has caused financial investors to stay away,” another speaker said about Beijing’s efforts to attract liquidity to its market by launching a swap contract.

Some 18 months before China launches its national ETS, little or nothing is known about the design and price levels in the scheme, who will participate from the start, or what will happen to unused allowances from the pilots.

The NDRC has proposed to lift the ban on futures trading when the national ETS launches, given that most observers say one of the main reasons for the poor liquidity in the pilots is that only spot trading is allowed.

A final decision on futures is to be made by the China Securities Regulatory Commission. One speaker on Monday said the CSRC is considering several options, including a possible regional futures trading pilot or introducing futures trading once the spot market achieves a pre-defined level of liquidity.

By Stian Reklev – stian@carbon-pulse.com

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