The Shanghai Stock Exchange is to allow leading listed companies to issue covered warrants in order to increase liquidity in the market and help it to compete with other exchanges such as Hong Kong, an exchange executive said. The exchange, which last year introduced equity warrants, plans to introduce more products in order to meet the need of fund management companies and other institutional investors seeking to invest about 270 billion yuan at their disposal. 'The most important problem for us right now is to launch new products and new trading mechanisms,' James Liu Xiaodong, the executive vice-president of the exchange, said at the weekend. With more institutional investors buying stocks for long-term purposes, the market faced reduced liquidity, he added. Covered warrants give holders the right to acquire a share or bond at a specific price and date. They are created by an investment bank or some other financial institution and are not issued by the firm itself. In July last year, the Shanghai exchange ended a nine-year ban on equity warrants as part of moves to compensate holders of stock affected by share restructuring instigated by the securities regulator. Listed companies or their controlling shareholders could choose to issue warrants to be paid to holders of tradable stock in order to compensate them as non-tradable shares were made tradable. Shanghai Baosteel Group, the first company since the end of the ban to issue warrants on the exchange, paid holders of tradable shares 2.2 shares and one call warrant for every 10 shares they held. As of yesterday, 18 warrants were trading in Shanghai and three others had expired. The Shanghai exchange also had to improve its competitiveness compared with Hong Kong, the world's largest warrant market, particularly as increasing numbers of companies had shares listed in both cities, where they fetched different prices, Mr Liu said. Investment banks in Hong Kong issued 21 warrants for Industrial and Commercial Bank of China, attracting trading volume of HK$1.2 billion on October 27 when the lender listed. The China Securities Regulatory Commission has yet to issue rules on covered warrants, which may prevent exchanges launching the product in the immediate future.