China will open a carbon futures exchange in Guangdong province, state media reported on Monday, a move designed to help end a liquidity dearth in a market currently restricted to spot trading only.

A principal agreement has been made to set up the new exchange, according to the Economic and National News Weekly, owned by Xinhua News Agency, cited unnamed sources close to top decision-makers.

Experts say the lack of a futures market has been one of the key reasons why China’s seven pilot emissions markets have struggled to build much liquidity.

“There is a need for a futures instrument in the Chinese market, especially for price discovery, but also for compliance companies to hedge,” Jeff Huang, Greater China managing director with the IntercontinentalExchange told Carbon Pulse.

If the new exchange is confirmed by the State Council, it is likely to serve the national market – which China plans to launch in mid-2016 – and not the pilot markets, which are all served by local exchanges.

China’s national ETS will be run by the National Development and Reform Commission (NDRC), which long has voiced support for futures trading in the emissions market, despite China’s general reluctance to risk price disturbances by speculative trading.

Last week, Jiang Zhaoli, a director at the NDRC climate change department told a conference in Beijing that the NDRC expects spot trading in the national carbon market to be worth around 1.2-8 billion yuan ($190 million-$1.28 billion) annually while futures contracts could trade for 60-400 billion yuan.

But the Securities Regulatory Commission must also approve the establishment of a futures market before a final decision can be made by the State Council.

Jiang also said last week that China’s national carbon market should be served by 7-10 exchanges, meaning all seven current carbon exchanges could survive while also leaving room for up to three new ones.

By Stian Reklev – stian@carbon-pulse.com