Foreign companies thus have little investment might in stock index futures in China. In addition, the investment scale of foreign companies in this regard will surely be capped, like QFII businesses in China, which have almost no effect on the A-share market.

Talking about the huge disaster in the Japanese stock market due to the entry of foreign businesses into the country's stock index futures business, Xie said that unlike China, the financial market in Japan operates under a convertible currency policy. Xie added that foreign investment in Chinese stocks is restricted, so it will not have as much influence in China as it did in Japan.

Fang Shisheng: Investment restrictions

Xie's viewpoint was echoed by Fang Shisheng, a senior advisor with Orient Securities. "There are expected to be fairly tight investment restrictions for QFII businesses that are allowed to invest in stock index futures," said Fang, who is also an expert at the China Financial Futures Exchange.

Fang attributed the grave impact from foreign investment on Japan to its economic bubble in that period. For instance, when Japan experienced the stock disaster in 1990, the stock market also crashed in Taiwan, which at the time was not open to QFII businesses and had not yet launched a stock index futures business. Accordingly, QFII investment in the market was not a primary contributing factor.

"Certainly, QFII had an outstanding performance in terms of stock index futures in the Taipei stock market due to the fact that QFII enjoyed a share of 20 percent to 30 percent in the spot market," Fang said. "QFII, however, will by no means have such a big influence on the A-share market in the Chinese mainland."

Rise and fall of the Nikkei index

In the late 1980s, Japan enjoyed a bull market, with the Nikkei index starting to soar in 1986. In September of the same year, the launch of the Nikkei stock index futures business in the Singapore stock bourse led to a 20 percent drop in the Japanese stock market, which later recovered its bullishness. In 1987, Morgan Stanley, a global financial services firm, became a trade member of the Osaka Securities Exchange and was allowed to set up a limited liability investment consulting company. The Osaka Securities Exchange launched Nikkei index futures and options in 1988 and 1990, respectively, and on December 29, 1989, the Nikkei index reached a record high of over 38,900.

Lang said that during this period, foreign businesses like Morgan Stanley contributed to bubbles in Japan and were able to short sell in Japan's stock market.

In January 1990, American securities businesses launched Nikkei index put options. In less than a month, the Japanese stock market began collapsing. Later, the Chicago Board of Trade put forward Nikkei index futures and options, causing the further decline of the Japanese stock market. By October, the Nikkei index had dropped to 19,781, declining nearly 50 percent. With the collapse of the stock index, American investors buying put futures and put options (expecting the index to decline) made an astonishing amount of money.

When the Nikkei index fell, banks and insurance companies in Japan bought call options—expecting the bull market to remain intact—and suffered great damages. The further slump of the stock market led to Japan's financial crisis which, in turn, caused the real economy to slide. The Japanese stock market has never returned to its 1989 peak of 38,957.

(Source: National Business Daily, translated by LI YUZHU)

Related reading: Lessons From Japan