Precision, practice and a paternalistic eye is perhaps the quintessence of the Chinese success story. Be it the Olympics opening ceremony, or the launch of the stock index futures, nothing here is left to chance.

For three years now, around 850,000 investors have opened accounts with the China Financial Futures Exchange, or CFFEX, to participate in mock trading sessions with index futures and short selling.

The government's aim: no investor should find himself in the deep end when China introduces these sophisticated products to its capital markets.

After four years of careful preparation, simulation and risk assessments, China is finally ready to take a "giant leap forward" with the official launch of derivatives. This will allow domestic investors to sell short for the first time.

On Saturday, the China Securities Regulatory Commission (CSRC) gave formal approval to all trading contracts and regulations. Index futures will be traded on the China Financial Futures Exchange and qualified investors can start opening accounts from today. That's not to say trading will start just yet, but market observers say this should come any time in March.

Index futures took its time coming. The CSRC has been toying with it since 2006 when the futures exchange was first set up in Shanghai. Caution has always been the watchword in China's experiments with capitalism.

After months of brainstorming and public debate, the rules come down to this: Individual investors must have a minimum of 500,000 yuan so as to trade in index futures and be able to meet potential margin requirements.

They must also pass relevant examinations in futures trading, must participate in mock trading in index futures for at least ten days and conduct at least 20 simulated transactions. They will also be evaluated based on four criteria including age and educational background, trading experience, financial status and personal credit record.

Protecting interests

Regulatory officials say, unlike stocks and bonds, index futures are financial tools of high leverage and risk that require professional knowledge and trading experience. They say the purpose of the regulation is not to restrict investors from trading but to protect their fundamental interests.

Trading contracts for index futures are based on the CSI 300 Index, which is composed of the 300 largest A shares listed on the Shanghai and Shenzhen stock exchanges. The value of the futures contracts will be points of the CSI 300 multiplied by 300 yuan.

However, Pan Fei, who had a bitter experience buying commodity futures two years back, remains cagey. He says he will perhaps qualify as an investor, but right now considers short selling a very risky option and will steer clear.

Chinese investors, long used to straightforward trades, are likely to remain in the fringes. Statistics show that fewer than 3 per cent of Chinese retail investors had more than 500,000 yuan in their individual stock-trading accounts by the end of last year. For the moment, institutional investors are more enthusiastic. As part of a pilot programme, large securities houses like CITIC Securities, Haitong Securities and Guotai Junan Securities are likely to become the first firms to trade stock index futures.

Foreign investors will also be able to trade, although the time frame for them to take the plunge is not clear. Approved overseas investors can trade in yuan-denominated shares only under the qualified foreign institutional investor, or QFII, programme. Foreign institutions may be allowed to trade index futures using a portion of their QFII quota.

For too long, China has lacked the sophisticated financial tools used in foreign markets that could help it manage unanticipated domestic stock price moves. For instance, the benchmark Shanghai Composite Index jumped 80 per cent last year after slumping 65 per cent in 2008. The index has lost since the beginning of this year and with China's economy now showing signs of overheating, analysts are worried that the equities market may be poised for another sudden downturn.

The new tools would protect investors against losses and also help them to profit from any declines. It remains to be seen just how swiftly Chinese investors play this double-edged game.

 

The columnist is a freelance business writer based in China