Institutional Interventions and Performance of Futures Markets in China

In this paper we study the development of the most successful futures market in China, the Zhengzhou Commodity Exchange (ZCE). The lack of an active cash market forced ZCE to first establish a cash market prior to the trading of the first successful futures contract; the mungbean futures. However, mungbean is a relative native commodity in China, and the lack of a truly active cash market partly contributed to the relatively poor performance of the contract. Perhaps driven by the relative popularity of the wheat futures in other countries, the ZCE decided to promote the thinly traded wheat futures in 2000. Our empirical results suggest that the ZCE's decision to promote the wheat futures is a correct one. More specifically, the wheat futures produce results similar to those we observe in successful futures contracts traded in industrialized countries