China will soon launch a new commodity futures contract as the country pushes for development of its commodity derivatives market. Starting from August 18, cotton yarn futures will be trading on the Zhengzhou Commodity Exchange, with preparation work for the launch already completed.

Trading tests will take place on August 5 and 12. Futures contracts oblige investors to buy or sell underlying assets at a predetermined price at a specified time, helping investors mitigate risks of price volatilities.

Cotton yarn futures together with cotton futures, which are already traded, would help companies in the industry to hedge against and improve management of risk. Large and frequent fluctuations in cotton yarn prices have had a negative impact on related industries in the past few years, and the launch of the cotton yarn futures will be an answer to market demand.

China has been developing its commodity derivatives market and plans to gradually open it up to foreign investors. Earlier in April, the country launched white sugar options, the second commodity options after soybean meal.

China is changing the dynamics of trade from price-setting to risk management. Despite criticism that the Chinese commodities exchanges are rife with retail investor speculation, their wild price moves still influence global pricing.