economics

April 22, 2010

China Takes Step Into Futures

Filed under: Uncategorized — ktetaichinh @ 7:28 pm
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SHANGHAI—Stock-market-index futures debuted Friday in China, a much-awaited step to liberalize markets amid investors’ hunger for new investment products.

Imaginechina/ZUMA PressShang Fulin, right, chairman of the China Securities Regulatory Commission, and Yu Zhengsheng, secretary of the Shanghai Municipal Committee of the Communist Party of China, appeared at a gathering to launch stock futures April 8.

CFUTURES

CFUTURES

Futures for the first time give investors in China the ability to make trades based on their expectations the overall market will fall, not just rise.

Analysts say the inability to do that has helped fuel Chinese stock-market bubbles because bears have no choice but to sell, giving disproportionate influence to market bulls.

The index futures will also offer a leading indicator of where investors think prices are headed.

The futures have been a decade in planning, in part because market regulators were reluctant to allow a product they fear could destabilize stocks. Analysts say the futures mark only a modest modernization, while limits on who can trade them and how they will trade will blunt their ability to send price signals.

Regulators have picked a quiet moment to introduce futures, with the benchmark Shanghai Composite Index down around 3.4% this year. Index futures gained handily in early trading on the China Financial Futures Exchange, an affiliate of the Shanghai Futures Exchange, a sign of support for the overall market and enthusiasm about a new product.

Index futures are tied to the CSI-300, an index of 300 large-capitalization Shanghai- and Shenzhen-listed Class A shares. So far in 2010, the CSI has lost around 4.6%, ending Thursday’s session down 0.3%. The index gained about 54% in 2009.

Over the years, analysts often blamed the volatility of China’s stock market in part on the absence of stock-index futures. The Shanghai Composite surged 80% last year, fell 65% the previous year and rose 97% in 2007.

Chinese authorities have embraced futures in major commodities and liberalized that market enough to make Chinese futures in copper and sugar among the most traded anywhere.

Authorities have warmed to futures tied to financial products, in particular to stocks, even as activity in financial futures was blamed in Wall Street’s 2008 meltdown.

But unlike Wall Street’s complex real-estate-based products, China’s futures are considered simple.

ReutersTWO WAYS TO WAGER: New products will allow investors to bet on an index falling instead of just rising. Above, a stock display in Huabei, China.

CFUTURES

CFUTURES

Also, Beijing is moving cautiously. Many individuals and other participants, including mutual funds, won’t be permitted to deal in stock-index futures immediately.

About 7,000 investor accounts have been opened to trade the index futures, compared with 121 million stock-market accounts, also suggesting trading will be limited.

Last month, Zhu Yucheng, general manager of the China Financial Futures Exchange, said 98% of those who had opened accounts to trade futures were individual investors.

Thin, retail-oriented trading in index futures could lead to dramatic fluctuations in their values initially, analysts say.

Regulators in recent weeks permitted trading of products tied to selected individual stocks, including margin trading and short selling. Rules also curtail activity in these products, and volume has remained small since last month’s debut.

The initial stock-index futures will expire on the third Friday of each month, starting with contracts in May, June, September and December.

The exchange set a base price at 3399 for all four contracts, slightly above Thursday’s close. Analysts said the base price is in the recent range of the CSI-300 Index and has been chosen as a lucky number by the regulator. In Cantonese, “three” sounds like the character for “rise” while “nine” sounds like the one for “long.”

“The exchange probably wants to limit arbitration between the four contracts by setting the base price at the same level,” said Jing Zhuocheng, an analyst at Shanghai Cifco Futures Co.

The contract level will be permitted to rise or fall as much as 10% in one session, according to rules published by the exchange.

—Wynne Wang
contributed to this article.

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