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CIRCULAR OF THE STATE COUNCIL CONCERNING THE FURTHER CONSOLIDATION AND STANDARDIZATION OF FUTURES MARKETS

    In pursuance of the arrangement of the State Council, China Securities
Supervision and Control Commission(hereinafter referred to as China
Securities Commission) has stepped up the work of consolidating and
standardizing future markets. Through the efforts in the last few years,
the momentum of blind development of futures markets in China has been
effectively contained with the gradual standardization of market conduct and
strebgthening of supervision and control capability. However, there still
exist at present certain problems in the futures markets which brook no
negligence, among which the most outstanding ones are the excessive number
of futures exchanges and futures brokerage institutions and non-standardi-
zation of operations; a small number of institutions and individuals joining
hands in manipulating the markets and seeking exorbitant profits; existence
of illegal acts of engaging in overseas futures and foreign exchange trading
on margin; weakness in supervision and control forces of the supervision
and control departments and backwardness of the means of supervision and
control. With a view to strengthening the supervision and control of the
futures markets in real earnest, preventing and absolving market risks and
ensuring the smooth carrying out of the experiments of the futures markets,
the relevant questions are hereby notifed as follows in the light of the
spirit of the national conference on finance work and the unified
arrangement of the Central Committee of the Chinese Communist Party and
the State Council:

    I.Continuation in the Consolidation, Disbandment and Amalgamation of
Futures Exchanges

    (I)The existing 14 futures exchanges shall be consolidated, disbanded and
amalgamated and only 3 futures exchanged shall be retained in Shanghai,
Zhengzhou and Dalian in accordance with the principle of "continuation of the
experiment, strengthening of supervision and control, standardization
according to law and prevention of risks". The futures exchanges retained
shall practise centralized uniform management and futures exchanges shall be
put under the direct administration of China Securities Commission, taking
the management system of stock exchanges as reference. The general manager
and deputy general manager(s) of a futures exchange shall be appointed by
China Securities Commission, and the chairman and vice chairman(chairmen) of
the board of directors shall be nominated by China Securities Commission and
elected by the board of directors.

    (II)Detailed measures of adjustment are as follows:

    1.Amalgamation in the same city. Upon appraisal of properties and
funds, Shanghai Metal Exchange, Shanghai Commodities Exchange and Shanghai
Foodgrains and Oils Commodities Exchange shall be amalgamated into Shanghai
Futures Exchange in accordance with the principle of "unified institution,
unified finance, uniform trading, uniform settlement and uniform rules".

    2.Networking in different cities. Excluding the maintenance of Shanghai
Futures Exchange, Zhengzhou Commodities Exchange and Dalian Commodities
Exchange, other futures exchanges shall be reorganized as company-based
local trading halls or local offer halls and conduct net trading with the
above-mentioned 3 futures exchanges. Local trading halls or local offer halls
shall provide the members of futures exchanges with trading seats in
different cities and services of note issuance and shall not engage in
listing of futures categories, shall not engage in match-making in trading
and shall not handle settlement business. Local trading halls or local offer
halls shall enjoy corporate status and be committed independently to the
debtor-creditor relationship of the original futures exchanges.

    3.To achieve stable transition, the futures exchanges not to be
retained can also be reorganized by adopting various modes:first,
reorganization as futures brokerage firms; and second, reorganization
as securities management agencies where conditions mature.

    II.Cancellation of Part of Futures Trading Categories of Commodities
and Increment in the Futures Trading Guaranty Funds of Part of Commodities
Varieties

    To give full play to the functions of futures markets in the discovery
of price and hedging and to further curb over-speculation, the number of commodities futures trading varieties shall be cut down from 35 to 12,
cancelling 23 categories. 12 commodities varieties of copper, aluminium,
soya bean, wheat, soya bean scum, green bean, natural rubber, plywood,
indica rice, beer barley, red bean and peanut kernel shall be retained.

    Increment in the futures trading guaranty funds of part of commodities
varieties. The rate of minimum trading guaranty funds shall be maintained
at the existing 5% without change for the 3 commodities varieties of copper,
aluminium and soya bean which have a better function in hedging and are
not easy to scalp, the rate of minimum trading guaranty funds for the other
9 commodities varieties shall be raised to 10%. Shanghai Futures Exchange,
Zhengzhou Commodities Exchange and Dalian Commodities Exchange shall
re-design the futures contracts and engage in listing and trading upon
the verification and approval of China Securities Commission. Henceforth,
China Securities Commission may in the light of market demand adjust the
listing varieties and fix the rate of minimum trading guaranty funds.

    III.Banning Illegal Futures Brokerage Activities, Sorting out and
Consolidating Futures Brokerage Agencies

    (I)Revocation of futures brokerage qualification of members of all
non-futures brokerage firms and no agency or individual shall engage in
futures brokerage business without the approval of China Securities
Commission. Departments of industry and commerce administration shall,
in conjunction with China Securities Commission, conduct in a serious
manner investigation and handling with respect to agencies or individuals
engaging in illegal futures brokerage business under various names and
impose a firm ban thereon.

    (II)Raise of the rate of minimum registered capital of futures brokerage
firms and promotion of amalgamation and reorganization of futures brokerage
firms to achieve scale operations. Rate of minimum registered capital of a
futures brokerage firm shall be worked out separately by China Securities
Commission.  

    (III)No futures brokerage firm shall engage in own-account futures
business operations, further sorting out and consolidation shall be carried
out with respect to agency business and standardization of all links in
trading realized so as to put risks under strict control.

    (IV)Perfection of annual inspection system, nullification of futures
brokerage firms not in keeping with the provisions, and adequate support
rendered to big-size brokerage firms with standardized operations and good
credit standing.

    IV.Strict Control over Overseas Futures Trading

    The State Council hereby reiterates once again that no agency or
individual shall, without approval, engage in overseas futures trading
on its/his/her own and no futures brokerage firm shall engage in overseas
futures business. For the small number of import and export enterprises
which have the actual requirements to exploit overseas futures markets in
hedging, China Securities Commission shall, in conjunction with the State
Economic and Trade Commission and the Ministry of Foreign Economic Relations
and Trade, carry out strict examination and verification and upon submission
to and approval by the State Council, issue overseas futures business
licences. No enterprise without obtaining the overseas futures business
licence shall engage in overseas futures trading under any pretext and
in any form. Enterprises having obtained overseas futures business licences
shall only be permitted to engage in hedging in overseas futures markets
and shall not engage in speculative trading. The State Economic and Trade
Commission and the Ministry of Foreign Economic Relations and Trade shall,
in conjunction with China Securities Commission, determine the trading
varieties and the maximum futures trading turnover in accordance with the
import and export commodities categories and actual trade volume of those
enterprises, and China Securities Commission shall designate their overseas
futures brokerage agencies and overseas futures exchanges.

    Overseas Chinese-capital agencies shall be prohibited to engage in
overseas futures trading on their own without approval, those in violation
thereof shall be investigated of the liability of the personnel involved.
The State Economic and Trade Commission and the Ministry of Foreign Economic
Relations and Trade shall carry out sorting out and consolidation of industrial and foreign trade enterprises already engaging in overseas
futures trading and report the results of consolidation to the State
Council and despatch a copy simultaneously to China Securities Commission.

    China Securities Commission shall, in conjunction with the departments
concerned, strengthen the supervision and control over illegal overseas
futures trading. China Securities Commission shall, in conjunction with the
departments concerned, investigate and handle cases involving securities
operating agencies' and futures brokerage agencies' operations in overseas
futures in violation of law; the State Administration of Industry and
Commerce shall, in conjunction with the departments concerned, investigate
and handle cases involving other agencies illegally engaging in overseas
futures. Stern penalties shall be meted out to enterprises and overseas
Chinese-capital agencies engaging in overseas futures trading on their own
in violation of the afore-said provisions, persons-in-charge and persons
directly responsible of the enterprises shall be imposed the penalty from
removal from office to expulsion by their higher competent departments,
and the leadership of their higher competent departments shall be
investigated of their responsibilities; where a crime has been constituted,
the case shall be transferred to the judicial organ for the investigation
of criminal liability according to law.

    V.Acceleration of Legislation and Further Strengthening of Supervision
and Control over Futures Markets

    As futures markets are highly risky and speculative, legislation for
futures markets shall be accelerated to realize supervision and control
in accordance with law. The Legislative Affairs Office under the State
Council and China Securities Commission should make good use of time in
drafting the regulations on futures trading administration to be submitted
to the State Council for review. China Securities Commission should further
step up supervision and control over futures markets, standardize and unify
the rules of futures markets on trading, settlement and delivery. Financial
institutions, institutions, Party and government organs are strictly
prohibited to participate in futures trading, state-owned enterprises
are strictly prohibited to engage in futures trading in violation of regulations, credit funds and financial funds are strictly prohibited
to flow into futures markets in any form, and financial institutions shall
not provide financing or guaranty for futures trading. No institution shall
engage in financial futures trading without approval. Domestic financial
institutions' foreign exchange trading in violation of regulations shall
be investigated and handled in accordance with law. Internal management of and external supervision and control over the financial institutions
engaging in forward exchange as well as straddling, exchange rate swap and
other businesses shall be strengthened.

    As of the date of issuance of this Circular, all futures exchanges shall
stop forthwith to roll out any new contract, trading may be conducted to the
last trading day for the contracts already listed. As of January 1, 1999,
operations shall start officially in accordance with the new futures
commodities varieties and rate of trading guaranty funds. China Securities
Commission should further step up supervision and control and intensify its
efforts in law enforcement. All regions and departments should earnestly
implement the spirit of this Circular, exerting efforts in coordination and
rendering active support for China Securities Commission in doing well the
work of futures markets standardization and consolidation so as to maintain
market and social stability.