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UPDATED: May 17, 2009 NO. 20 MAY 21, 2009
Index Futures Come Nearer
Chinese stock index futures are ready for launch, with the initial aim of market stability
By LAN XINZHEN
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PEI XIN PRACTICE MAKES PERFECT: China's financial trading market is growing fast. Mock trading of the Shanghai Shenzhen 300 Index will prepare investors for the launch of stock index futures 

Chinese investors have seen the dawn of stock index futures. The long-expected investment tool may be launched soon, but officials at the China Securities Regulatory Commission (CSRC) are working to further improve trading rules and systems.

The CSRC will officially implement a system of investor qualifications and make it an important preparation before the launch of stock index futures, said Jiang Yang, Assistant Chairman of the CSRC, at a seminar on futures regulation held on April 21 in Beijing. Investor qualifications as required by the China Financial Futures Exchange (CFFEX) include: the balance of the margin account must be 500,000 yuan ($73,313.78) or more; investors must pass a CFFEX test; and they must have practical experience in the mock trading of stock index futures.

There is no precedent in either the securities market or the futures market of China to examine investor qualifications. Therefore both the market and investors need some time to adapt to the system.

But for those institutional investors with practice in the stock index futures business, the system of investor qualifications should pose no obstacle.

On September 8, 2006, the CFFEX was established in Shanghai and on October 30 that year, it began mock trading of the Shanghai Shenzhen 300 Index, helping investors better understand the trading rules of stock index futures.

The Shanghai Shenzhen 300 Index selects 300 kinds of A shares from Shanghai and Shenzhen stock markets, including 179 shares in Shanghai and 121 in Shenzhen. The samples, which are of large size and good liquidity, cover about 60 percent of the market value in Shanghai and Shenzhen and are a good representation of the market. The base date was December 31, 2004 when the index stood at 1,000 points.

After the mock trading began, individual investors, securities companies, investment funds and other institutions enthusiastically joined in, so that the mock trading has become a training platform for stock index futures for various investors. By May 7 this year, the Shanghai Shenzhen 300 Index had reached 2,767.08 points.

The Shanghai Shenzhen 300 Index used for mock trading will also be the official trading index after China's stock index futures are launched.

At present, there are four contracts on the mock trading platform for stock index futures, namely, IF0905, IF0906, IF0909 and IF0912.

On May 5, the CFFEX issued a circular on adjusting the margins for mock trading contracts. According to the circular, as of the May 7 clearing time, the trading margin standard for contract IF0905 changed from 14 percent to 12 percent, for IF0906 from 16 percent to 13 percent, for IF0909 from 18 percent to 15 percent and for IF0912 from 18 percent to 15 percent.

Investors consider the adjustment to be an improvement on the trading mechanism before the launch of stock index futures.

Market expectations

The potential role of stock index futures in stabilizing the market has made investors clamor for their launch. Chen Yaoxian, President of China Securities Depository and Clearing Corp. Ltd., told Beijing Review that after three years of preparation, it is time to launch stock index futures.

During the session of the National People's Congress this year, many deputies jointly proposed launching stock index futures as soon as possible in order to promote the sound development of the capital market. The deputies think that stock index futures can be entrusted with the important task of improving the operating mechanism of the stock market and resuming its financing function.

At the Third China Financial Innovation Forum held at Peking University on April 12, Leo Melamed, who is recognized as "the father of financial futures," said this year is the perfect time for China to launch stock index futures.

According to Melamed, in 2007 some Chinese regulatory officials asked him whether the time was right to launch stock index futures. He said no, because bubbles in the global market were still growing and once they burst, people would blame this financial futures tool.

In his opinion, as so many market bubbles have burst since the beginning of this year, now is the time to launch stock index futures.

Also on April 12, at the Fifth China Financial (Experts) Annual Conference held in Beijing by the China Financial Research Institute, He Qiang, professor of finance at the Central University of Finance and Economics, said that now is the appropriate time to launch stock index futures, when stock markets are so low.

According to his analysis, there have been related supporting regulations for the launch of stock index futures, laying the mechanism foundation for their operation. In the meantime, after three years of solid preparation, the CFFEX is ready to launch stock index futures in all aspects. On the basis of extensive investor education, the CFFEX has established the system of investor qualifications, ensuring that its members will sell stock index futures products to appropriate investors and that only investors with sufficient funds, knowledge and experience can participate in the trading. Hence the Chinese capital market is ready for the launch of stock index futures.

He continued that at present the Chinese stock market is in a crucial time of recovery and that the launch of stock index futures is important for improving the inherent stabilizing mechanism.

Final preparation

The CSRC has always had worries about the launch of stock index futures while under pressure from investors. At the seminar on futures regulation held on April 21, CSRC Chairman Shang Fulin said that the commission would strengthen supervision over the futures market, focus on striking market manipulation to prevent and reduce financial risks, and make full play of the futures market functions. It will discover, stop, investigate and punish in a timely manner any acts violating laws and regulations. The commission will also continue to strengthen its supervision over the compliance of futures companies.

These measures are to regulate futures companies before launching stock index futures. On April 22, the CFFEX announced its approval of five futures companies as new members, allowing them to engage in commission trading of stock index futures. Currently there are a total of 94 CFFEX members, of which 15 are general clearing members, 52 are trading and clearing members and 27 are trading members.

With the development of the futures market and possible launch of stock index futures, securities companies are speeding up their enclosure of futures companies. They now control or have shares in 61 of the nation's 162 futures companies, with the former all being CFFEX members. Will it be easier for these securities companies to seek gains by manipulating the futures market and the stock market? It's hard to say yes or no, but such worries do exist.

Jiang pointed out that to implement supervision over securities and futures companies nationwide, the CSRC needs to focus on six aspects, such as classified supervision over futures companies and further perfecting jurisdictional supervision over the futures business.

According to Jiang, launching the investor qualification system is one of the major tasks of futures supervision. Stock index futures are an effective tool for managing systematic risks on the stock market, but their special product risks also require that investors have the necessary knowledge, professional standards, economic strength and risk-bearing capability.

Zhang Xiaogang, head of CFFEX's research and development department, told Beijing Review that internal preparations have been completed.

According to Zhang, in the initial stage after stock index futures are launched, the goal is not to boost trading volume, but to ensure stable operation of the market. This has been reflected in the design of stock index futures contracts and the margin mechanism.

With the completion of preparation work, the launch of stock index futures may not be far off.

Chronology of Stock Index Futures

April 8, 2005: The Shanghai Shenzhen 300 Index opens based on 1,000 points.

September 8, 2006: The China Financial Futures Exchange (CFFEX) is established in Shanghai.

October 25, 2006: The CFFEX issues the mock trading rules.

October 30, 2006: The CFFEX begins mock trading of the Shanghai Shenzhen 300 Index.

June 27, 2007: The CFFEX issues its trading rules and related implementation rules, signifying that China's financial futures trading rules have taken shape.

Source: Beijing Review

 



 
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