'Death' of China futures trading amid tight limits and probe into short selling

Once the world's most heavily traded futures market, the China Financial Futures Exchange just ended its worst month in years as it awaits results from investigations launched by the securities regulator.

Monthly volume on the exchange in October fell to a five-year-low of 158.5 million yuan, from a record high of 8.8 billion yuan just four months earlier, or what equated to "the death of a market", according to insiders.

Trading volume in the burgeoning market took a precipitous dive starting in August after the China Securities Regulatory Commission slapped tight margin requirements and position limits on futures trading.

Experts are now projecting a slow recovery and a long wait for an end to the tight limits put in place.

"Our view is that they will slowly restore the market by lifting one by one some of the limitations," Zheng Tao, an analyst at GF Securities' derivative trading desk in Guangzhou, said of the regulator, which is investigating trading houses for "malicious" short selling.

An easing of restrictions could come as soon as the end of the year, Zheng added, as some of the early conclusions to the investigations are reached.

China's securities market began a more than 40 per cent plummet in June. That led investors to hedge their investments with short positions, accounting for the great volume on the futures exchange in July.

By August, investigations into many of the country's biggest brokerages were announced and the regulator accused traders of manipulating the market.

Before those investigations are concluded, there is little chance that China's futures market will be brought back to life.

"The investigations need to be completed before the restrictions can be lifted," said Hong Hao, chief strategist at Bocom International in Hong Kong. "Even if you clean up the market, someone has to take responsibility."

Along with the Chinese brokers accused of market manipulation, CSRC also froze Citadel Securities' trading account, the first time the regulator took action against a foreign firm.

The sluggish trading data caps an otherwise promising week for China's futures market after a joint venture agreement was signed between two Chinese exchanges and the country's foreign exchange trading operator with Germany's stock exchange operator Deutsche Boerse on Thursday at a meeting between the two countries' leaders.

Under the agreement, yuan-denominated offshore products, including bonds and exchange traded funds, will launch in Germany on November 18.