Source: Market Watch
Jan. 25, 2011, 3:09 p.m. EST
By Jacob Bunge
Chinese regulators on Tuesday outlined steps that would allow companies and individuals based overseas to trade in its new financial-futures market, though with strict limitations.
The draft rules incorporate investment quotas and curbs on non-Chinese investors in stock-index contracts, but mark a key step forward for the country’s derivatives market, currently dominated by trading in commodities rather than financial products.
“Given the small size of China’s index futures market and local investors’ lack of experience...we imposed some limits on the types of transaction and trading behavior for foreign investors who want to take part in the business,” the China Securities Regulatory Commission said in a statement on its website.
Chinese regulators last April approved the trading of futures contracts linked to the CSI 300 stock index, planned since 2002 but held up by worries that the markets could put pressure on underlying stock prices. The products let investors hedge against the Chinese stock market falling as well as rising.
The nascent Shanghai-based China Financial Futures Exchange saw 45.9 million contracts traded last year, and regulators have weighed steps to curb rapid growth in the market.
“It’s a good move for Chinese markets,” said Saurav Arora, president of Jaypee International Inc., the U.S. unit of Indian derivatives trading firm Jaypee Capital Services. Arora said his customers have been interested in gaining greater access to Chinese markets, and opening up index futures trade to non-Chinese participants will provide flexibility for hedging market risk in the country’s stocks.
Only investors with a Qualified Foreign Institutional Investor license would be allowed to trade the stock index futures. The QFII program is the only way overseas investors can directly invest in the country’s financial markets. Each QFII is given an investment quota by China’s foreign-currency regulator after they receive a license.
“The QFIIs are only allowed to use the index futures to manage the risks of their portfolios and they aren’t encouraged to use it to arbitrage and speculate,” the CSRC said.
David Hale, a Chicago-based economist, said there was about $20 billion in foreign money invested in Chinese equity markets last year, with big equity-fund operators like Martin Currie Ltd. and Deutsche Bank AG /quotes/comstock/13*!db/quotes/nls/db (DB 60.02, -0.68, -1.12%) likely natural users of the stock-index futures market.
“China moves incrementally, it moves cautiously, but the important thing is that they created a futures market a year ago in spite of the financial crisis,” said Hale, who serves as an adviser to Chicago-based derivatives exchange operator CME Group Inc. /quotes/comstock/15*!cme/quotes/nls/cme (CME 309.48, +2.58, +0.84%) .
Regulators’ measured move forward Tuesday offered fresh evidence of China’s caution toward financial derivatives business. China started to study the roll-out of index futures in the late 1990s, but the memory of a scandal involving bond futures in the mid-1990s slowed the introduction.
Alex Lamb, executive board member of Germany’s RTS Realtime Systems Group, said the technology firm’s customers are “looking eagerly toward China.” Progress in developing the country’s derivatives exchanges has prompted RTS, which specializes in high-speed electronic connections to exchanges, to negotiate inroads to the country.
Lamb said RTS has a drawn up short list of technology vendors in the country with the aim of linking up to help RTS access China’s financial markets, which also include a clutch of commodity-focused exchanges.
According to government data, the value of transactions in China’s financial futures market totaled 41 trillion yuan ($6.23 trillion) last year, only a third of the transaction value in the country’s commodity futures, such as copper, soybean and sugar.
