Yong Zhiqiang, a researcher at the Research Institute of Haitong Securities Co. Ltd., thinks such worries are unnecessary, because under the current supervision mechanism, international capital has no legal channels to enter the Chinese financial market on a large scale.

According to Yong, China has not fully opened free convertibility under capital accounts. Because of strict restrictions on capital flows and market access, the only legal way for foreign capital to enter the Chinese financial market for portfolio investment is through qualified foreign institutional investors (QFII). Since the total scale of QFII is very limited, the scale of foreign capital entering the Chinese index futures market is estimated to be only $1 billion. Hedging may be the only transaction type for foreign capital to participate in stock index futures trading.

But will some international floating capital still enter the stock index futures market via underground means, such as currency smuggling, trade channels and parallel loans?

The CFFEX, according to Yong, has designed strict systems and supervision measures on index future contracts and risk-control mechanisms, leaving underground floating capital with no way to manipulate the market.

Looking at the situation historically, international floating capital usually beats markets where supervision is weak and the real economy is facing problems. These phenomena, however, do not exist in China. From the experience of overseas market development, there is no actual case where foreign capital has ever manipulated the index futures market.

As for underground illegal capital, the CSRC will cooperate with the central bank, jointly formulating an anti-money laundering framework, closely monitoring the flow of large amounts of cash in the banking system, and enforcing powerful monitoring and punishment measures against activities that could disturb Chinese financial markets.

Foreign capital participating in stock index futures trading will be limited, and only a few foreign-funded futures firms will obtain qualifications for stock index futures business.

China has opened its banking, insurance, securities and trust sectors to foreign capital, fields where there are a number of wholly foreign-owned or joint stock financial institutions. However, the opening up of futures industries lags other sectors. There are now only four joint stock futures firms in China.

According to Chinese policies, the futures market is open to foreign capital. The slow development of joint stock futures firms is mainly due to the fact that China has not opened free convertibility under capital accounts.

However, it is unlikely foreign capital will cease its efforts to enter the Chinese futures market. Once foreign capital participates in index futures trading on a large scale, it will be difficult for the supervision authority to control the risks.

How to guide foreign capital to invest in stock index futures is the question that the CSRC and other related departments should consider, because present trading rules lack restrictions on foreign-funded futures firms. On February 1, 2010, the CFFEX released a list of its new members, including J.P. Morgan Futures Co. Ltd., a futures firm with a foreign capital background.

Chronology of Chinese Stock Index Futures

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.

July 13, 2007: The CFFEX releases the first list of futures firms that have obtained qualifications for financial futures brokerage business.

January 8, 2010: The China Securities Regulatory Commission (CSRC) announces that the State Council approves in principle to launch stock index futures, and the CSRC makes an overall arrangement of preliminary work for the launch of index futures. This process is expected to need three months for implementation.