China to Begin Stock-Index Futures

A Bitter Memory Is Shed, as Market Prepares to Start in April, 15 Years After a Scandal.

SHANGHAI—China said it will introduce stock-index futures April 16, ending years of preparations that signaled policy indecision over the financial derivatives designed for risk-hedging, but also seen as vulnerable to speculative forces.

The announcement by the China Financial Futures Exchange, which will host the index futures, will give investors a means to bet on the direction of major share indexes and also allow them to make money when the market falls. It is expected to boost demand for index heavyweights such as major blue chips when trading resumes Monday.

Investors have eagerly anticipated the launch, which will expand options in a market where, up to now, being bullish has been the only choice because there has been little to shield investors in the face of a sharp decline. However, Chinese investors’ lack of experience in dealing with risky investment tools such as margin trading and short selling, and the country’s perilous experience with futures trading, form a big question mark over the index futures’ ultimate fate.

China banned financial futures in the mid-1990s after a scandal involving bond futures nearly brought down the country’s financial system.

Analysts say China’s securities regulator has chosen a relatively good time to start the stock-index futures. The benchmark Shanghai Composite Index is close to its historical-average level and showing few signs of a price bubble, leaving enough space for investors to bet in either direction.

The index futures will reference the CSI 300 Index, which consists of 300 yuan-denominated A shares listed on the Shanghai and Shenzhen stock exchanges, the Shanghai-based futures exchange said in a statement posted on its Web site.

The exchange also said it will initially trade contracts for May, June, September and December.

“More direct beneficiaries, namely blue chips such as banks, insurers and securities firms, will likely rise on Monday following the news but the upside could be limited due to uncertainty over further monetary tightening in China,” said Jacky Zhang, an analyst at Capital Securities.

The Shanghai Composite Index rose 1.3% to 3059.72 Friday, at a half-way point from its peak of 6124.04 recorded Oct. 16, 2007.

From a technical point, the current level is widely viewed as ideal for the launch of the index futures. “Some may see it as a glass half empty, or half full, I see it as starting at the center of the basketball court,” said Qian Qimin, an analyst from Shenyin Wanguo Securities.

In 1995, a trading scandal in which government bond futures were widely manipulated threatened the health of the financial system. Memories of that scandal have made regulators leery of financial derivatives.

Financial problems involving derivatives at home and in overseas markets from Singapore to Paris have also curbed Chinese policy makers’ desire to resurrect financial futures.

On the home front, China Eastern Airlines Corp., Air China Ltd. and Shanghai Airlines Co. posted combined losses of 13.2 billion yuan ($1.94 billion) in 2008 on fuel hedges that went awry. Hong Kong-based conglomerate Citic Pacific Ltd. had billions in losses on wrong-way bets on the Australian dollar.

Overseas, Société Générale SA disclosed €4.9 billion ($6.51 billion) in losses in January 2008, which it alleges were due to rogue deals by a low-level derivatives trader. In 1995, illicit deals brought down U.K. lender Barings Bank, after a trader concealed unauthorized trades that racked up losses of $1.38 billion.

Chinese officials have been at pains to assure investors that the start of the stock-index futures won’t cause sharp volatility in the market, promising tough regulations and stringent risk controls.

In February, the China Financial Futures Exchange set a threshold of 500,000 yuan for stock-index futures trading accounts, a high entry requirement that will likely keep most retail investors out of the game.

The exchange also said eligible participants must open accounts in person and pass an examination on the basics of the trading. They should have completed at least 20 mock stock-index futures transactions over a maximum of 10 trading sessions, and made at least 10 commodity futures transactions in the past three years, it said.