Beijing unveils guidelines for futures trade
Long-awaited measures taken to improve market maturity
Beijing has issued long-awaited rules to allow financial futures trading, a crucial step towards developing a more sophisticated equities market, that some fear may increase short-term volatility. In response, mainland share prices retreated yesterday.
Released by the China Financial Futures Exchange on its website, the rules will for the first time offer mainland investors an instrument with which to bet that domestic stocks will fall. This will allow them to hedge risk in one of the fastest-growing markets in the world.
The exchange will introduce four types of CSI 300 index-based futures contracts that can be bought, sold or short traded. However, the announcement fell short of naming a launch date for futures trading.
'It's a big step forward for the Chinese market as it will create more financial instruments to trade,' said Jing Ulrich, the chairman of China equities at JP Morgan Securities.
On the other hand, concern over possible funds diversion from the stock market and likely abuse by novices, drove down the Shanghai Composite Index by 4.03 per cent to close at 3,914.204 points yesterday.
The Shenzhen Composite Index that tracks the smaller of the two mainland exchanges dropped 5.43 per cent to 1,112.569 points.
The CSI 300 - which tracks the biggest-cap A shares in both markets - fell 181.96 points or 4.5 per cent to 3,858.52, its biggest daily fall in more than three weeks.
Analysts in Shanghai expect futures trade to begin in the second week of October, following the National Day holiday.
'Since it is a good hedging instrument, it will increase volatility in the market in the near term, but have a stabilising effect in the long term,' Mrs Ulrich said.
For institutional investors, one key concern about the mainland market is its lack of a mechanism allowing them to make money from a fall in equity prices.
The mainland still does not permit short selling of stocks, a common method that investors use worldwide whereby they sell borrowed shares to bet that a stock price will fall when time comes to return them.
To deter inexperienced retail investors from gambling on complex derivatives and potentially unsettling the stock market, the new rules set a minimum investment level of about 120,000 yuan.
By comparison, the minimum investment in Hong Kong index futures is HK$45,000.
Investors buying or selling mainland futures will be required to put up 10 per cent of a contract's value, to be set at the CSI 300 Index total multiplied by 300 yuan. With the index hovering at 4,000 points recently, a contract will be worth 1.2 million yuan.
'The rules on trading futures are extremely severe compared with other exchanges. But this is necessary because this is still a very immature market with very poor risk control,' said Yi Linming, an analyst at Industrial Securities.
As a further risk control, each investor also will be limited to trading no more than 600 contracts for the same settlement date.
Fears that inexperienced speculators would swamp the futures exchange was a key factor in the state's decision to delay the introduction of futures trading.
The Shanghai futures exchange originally was to begin operations at the start of this year.
Shang Fulin, chairman of the China Securities Regulatory Commission, in January said that stock index futures would be introduced only when conditions were 'mature'.