For three years Wang Liangguang, an experienced stock investor, waited patiently for the trading of stock index futures. And now, that day has arrived—stock index futures will soon be launched on Chinese financial market. The China Securities Regulatory Commission (CSRC) may officially launch stock index futures as soon as May.

After being laid off by a state-owned machine tool plant in Beijing in 1997, Wang worked for a series of private companies. In 1999, he began focusing his time and resources on the stock market, making money along the way, if only minimal amounts.

Three years ago, Wang opened an account in a futures firm, taking part in mock trading of stock index futures with the aim of gaining experience prior to the official launch of index futures. Beijing Review covered Wang's story in June 2007.

After three years of practice, Wang is ready to try his hand at making trades and accumulating a little extra cash.

Government preparations

Investors have been appealing to the government to launch the stock index futures as early as possible, giving them another investment channel. To accelerate a smooth launch of index futures, CSRC has spent years preparing for the event.

On September 8, 2006, the China Financial Futures Exchange (CFFEX) was established in Shanghai by the Central Government to regulate stock index futures, options and other financial derivatives. On October 30, 2006, the CFFEX began mock trading in order to familiarize investors with new trading rules associated with stock index futures. Wang was among the investors who opened futures account at this time.

The Shanghai Shenzhen 300 Index was used for the mock trading of stock index futures. The index selects 300 types of A shares from the Shanghai and Shenzhen stock markets—179 shares in Shanghai and 121 in Shenzhen. The samples, which are large in size and of good liquidity, cover about 60 percent of the market value in Shanghai and Shenzhen and offer a good representation of the market. The index was based on December 31, 2004, stock figures at 1,000 points.

Trading will also be possible on the Shanghai Shenzhen 300 Index after China's stock index futures are officially launched.

There are currently 162 futures firms in China, of which 130 have obtained stock index futures qualifications. Among the 130 firms, 124 have been accepted as CFFEX members.

According to Wang, during the mock trading period, the CFFEX, futures firms and the CSRC not only guided investors concerning the trading rules, methods and skills, but also initiated risk education aimed at investors.

In the meantime, the CSRC and CFFEX have begun perfecting the stock index futures mechanism after analyzing results from the trading trial. Related departments have also researched stock index futures mechanisms from various countries, designing the Chinese index around international practice. In 2008 the U.S. Commodity Futures Trading Commission and the CSRC signed an arrangement for enhanced cooperation and collaboration designed to promote investor protection, market integrity and the supervision of derivatives trading occurring on a cross-border basis between China and the United States. The American side is also expanding training and technical aid to China.

Disputed threshold

Qualifications for investors required by the CFFEX include: the balance of the margin account must be 500,000 yuan ($73,206) or above; investors must pass a CFFEX test; and investors must have trading records of more than 20 mock trades in 10 trading days or have trading records of more than 10 commodity futures trading within the past three years.

According to Hu Yuyue, Director of the Securities and Futures Institute of Beijing Technology and Business University, at present, more than 95 percent of China's individual investors have investment volumes below 500,000 yuan, and the high threshold will block most small and medium-amount investors. The threshold will surely disappoint investors who have spent many years anticipating index futures.

"Many of my fellow investors are opposing the minimum amount for opening accounts, saying this is too high for them. It's unfair if index futures are just a game for institutional and big-time investors," said Wang.

However, Qin Bing, a researcher at CIFCO Futures Co. Ltd., thinks the high threshold is reasonable. To most investors, Qin said, stock index futures are an unfamiliar financial product, different from commodity futures and stocks in terms of investment ways, market judgment and some other aspects that carry substantial risks. The high threshold at the early stage of stock index futures' launch is appropriate, giving small and medium investors time to learn and adapt to the new investment tool, he said.

Zhu Yuchen, General Manager of the CFFEX, also stressed that the threshold is not meant to discriminate against small and medium investors, but rather to consider different investors' risk endurance.

Only with steady development at the outset and sound policies commonly accepted by society will stock index futures develop in a sound and sustainable way, Zhu said.

From the establishment of the stock index futures mechanism, people should realize China not only hopes for a smooth launch, but is also taking precautions against a repeat of the incidents of Barings Bank and Societe Generale in China. Both banks suffered considerable losses after their employees operated stock index futures businesses against the mandated rules, a mistake that forced Barings Bank to declare bankruptcy.

Warranting Concerns?

Of the many risks to consider, Wang worries most about the manipulation of the stock index futures by foreign capital. In the Chinese market, such worries widely exist.