BEIJING - China is
considering speeding up the introduction of
financial futures and other derivative products,
now that the merger of tradable and non-tradable
shares has begun and the yuan is no longer pegged
to the dollar.
So said Shang Fulin,
chairman of market watchdog the China Securities
Regulatory Commission (CSRC), during a seminar
co-hosted by the Chicago Mercantile Exchange in Shanghai recently. The
CSRC may accelerate the study of financial
derivatives and futures to further develop the
financial markets and provide hedging products for
investors. As a first step, the CSRC is
considering launching stock index futures, the top
regulator said. Although he did not give a
detailed timetable, market experts say stock index
futures could be launched by the end of
next
year. Stock index futures are a bet on the future
price of an indexed group of stocks. Stock
portfolio managers can use this instrument to
protect themselves from price risks.
It is
vital to recognize that financial derivatives are
an integral part of some of the most critical
financial reforms now being carried out in China,
said Jeff Huang, president of ChiSurf Ltd, a Beijing-based
cross-border mergers and acquisitions (M&A)
advisory firm. The lack of stock index futures
products in China seriously hinders active
participation from professional institution
investors, according to Huang. No foreign
institution investors - who currently operate in
China under the qualified foreign institutional
investor (QFII) regime - will really take Chinese
stock markets seriously if, among other things,
they cannot hedge the risk of their A-share
positions with stock index futures, he said.
The establishment of new and professional
stock index companies has also helped to prepare
for the introduction of stock index futures, said
Dong Chen, a senior analyst at CITIC Jianyin
Securities. Several days ago, the China Stock
Index Limited was established in Shanghai with a
registration capital of 60 million yuan (US$7.4
million). The company was co-launched by the
Shanghai and Shenzhen stock exchanges. In a public
letter of congratulations by Shang Fulin to the
company, the chairman said the new index company
was expected to provide underlying indices for
stock index futures investors.
Meanwhile,
the presence of many professional institutional
investors including QFIIs, insurers, securities
brokers and social securities companies will make
it more likely that any future derivatives market
is run properly, Dong said. The analyst also said
it was important for the regulator to strictly
supervise the market by setting specific
percentages that companies can invest in stock
index futures. Early in 1996, the bond futures
market was suspended due to the lack of such
percentage limits, which had led to rampant
speculation.
More importantly, China
should pay close attention to standards, said
Huang from ChiSurf. As China expands its QFII
quota from $4 billion to $10 billion to attract
more foreign institutional investors like pension
funds and insurance companies, it must try to
adopt international standards when it launches
index futures products, he added. China should use
rules for trading, clearing and risk management
similar to those that international investors are
already familiar with. These measures will help
build investor confidence and ensure market
participation and liquidity from the big investors
that China is actively courting, he said.
Not everyone thought the time was right to
launch stock index futures. "I think it is still
too early for China to launch such products," said
Xu Gang, research manager of CITIC Securities,
which set up a joint stock index company with
Standard & Poor's early this month. Stock
index futures are based on stocks, but China has
yet to finish its stock market reform, he said.
China is now in the process of making
fundamental reforms to its financial market,
including the unpegging of the yuan to the dollar,
the flotation of non-tradable A shares, and the
launch of new financial products. For example,
warrants, a derivative security giving the holder
the right to purchase securities from the issuer
at a specific price within a certain time frame,
were launched last month.
Chicago
'Merc' eyes China Even as Chinese
authorities ponder accelerating the introduction
of derivatives in China's domestic market, the
Chicago Mercantile Exchange (CME), the largest US
futures exchange, is working with Chinese
regulators and banks to encourage their use of the
$600 trillion US-listed derivatives market.
Chinese financial institutions "will trade
CME interest-rate products, stock-index products
and foreign exchange products," said Chief
Executive Craig Donohue in an interview. The
products are aimed at helping to "protect wealth
and investments" as China's economy grows, Donohue
said.
The Merc is trying to position
itself to lead an evolving market for derivatives
in China, Asia's biggest economy after Japan,
along with banks such as Citigroup Inc and HSBC
Holdings Plc and rival exchange the Chicago Board
of Trade. The Merc co-hosted a futures conference
in China recently with the Shanghai Stock Exchange
and the Shanghai Futures Exchange.
As well
as its US-listed contracts, the Merc expects to
sell technology and clearing services to Chinese
exchanges and banks building a domestic market for
foreign-exchange and interest-rate contracts,
Donohue said in Chicago on Friday, before leaving
for Shanghai. The new China markets "might need
robust technology or clearing, and we think we can
offer that to them as partners, and potentially
service providers," Donohue said.
China
has taken a series of steps this year to loosen
currency controls, abandoning a decade-old peg to
the US dollar on July 21 and widening the yuan's
trading band against the euro, yen and Hong Kong dollar on
September 23.
The central bank said last
month it would let more than 130 domestic and
foreign banks trade yuan forward contracts and
swaps on behalf of clients. Citigroup and HSBC are
among the foreign banks that have received
licenses to trade yuan forwards. Forwards are
agreements in which assets are bought and sold at
current prices for delivery at a later specified
time and price. Futures, another type of
derivative, are exchange-traded agreements to buy
or sell an asset at a set time and price.
A derivative is a financial obligation
whose value is derived from interest rates, the
outcome of specific events (such as crop
harvests), or the price of underlying assets such
as debt, equities and commodities. Currency
derivatives such as forwards will allow local
companies and investors to protect themselves from
swings in the yuan and other currencies.
The Merc made a similar push in Europe 25
years ago by providing technological and other
assistance to exchanges there. Those markets,
including Frankfurt-based Eurex AG and London-
based Euronext.liffe, have become the Merc's
biggest global competitors. "Interest rates and
foreign exchange are probably the most attractive
products from a Chinese institutional standpoint,
foreign exchange in particular with the
liberalization that's occurred in China in the
last year," Donohue said. "We recognize that in
some sense we will become competitors with Chinese
markets as they develop," he said.
The
Merc is the world's biggest exchange for futures
and options on currencies and interest rates,
handling about $43 billion worth of
foreign-exchange contracts a day and interest-rate
contracts based on $2.4 trillion of underlying
assets. Investors and companies traded derivatives
on US exchanges based on about $600 trillion of
assets during 2004, the Bank for International
Settlements said in its quarterly review in
September.
The exchange is open to
exploring new joint ventures and alliances in
China, said Donohue, declining to name any
potential partners. He also declined to provide
projections for the growth in China's derivatives
business, beyond describing the potential as
"quite significant." China is the world's biggest
consumer of copper, wheat, rice, corn and cotton,
and the largest buyer of soybeans, which are
crushed to make animal feed and cooking oil. Its
futures market has mostly focused on metals and
grains.
