Document Sample
   APRIL 2010

CHINA PUSHES FINANCIAL                                                                              launch, a tiny fraction of the 140 million
                                                                                                    investors in the Shanghai and Shenzhen
INNOVATION WITH FUTURES                                                                             stock exchanges, with only a handful of
                                                                                                    wealthy individuals passing eligibility

                                                                                                    Institutional investors are largely staying
                                                                                                    on the sidelines to start with as they
                                                                                                    await specific rules and foreign investors
                                                                                                    will not be able to participate at first.

                                                                                                    Over time, however, futures should help
                                                                                                    bring greater diversity and
                                                                                                    professionalism to a market that has
                                                                                                    often been referred to as a casino -- that
                                                                                                    is, rather than just adding another table
                                                                                                    at which to play, it could be a catalyst for
                                                                                                    a fundamental shift towards a more
                                                                                                    mature approach.

                                                                                                    "The launch of index futures will be a
                                                                                                    new starting point for the deepening of
                                                                                                    China's capital markets," said Ba
                                                                                                    Shusong, a prominent economist at the
                                                                                                    cabinet's Development Research Centre.

                                                                                                    That shift is expected to come in part by
                                                                                                    increasing the role of large institutions,
                                                                                                    as opposed to the current dominance by
                                                                                                    retail investors -- who account for about
                                                                            Reuters Image           70 percent of stock market turnover and
                                                                                                    often end up following each other in one
By Jason Subler and Lu Jianxin                      "These are two of the hardest roadblocks.       direction, leading to big market ups and
                                                    I think the chances for it to work are fairly   downs.
SHANGHAI, April 15 (Reuters) - China's              high."
launch of trading in stock index futures                                                            NO MORE FOLLOWING THE PACK?
marks a milestone in making its financial           The stakes are high for the long-awaited
markets more professional and less                  introduction of futures trading, which was      But it's not just about mitigating the role
speculative, even though they are likely            pushed back on account of the global            of individual punters.
to get off to a slow start.                         financial crisis after years of planning.
                                                                                                     Many institutional investors themselves
By making it possible for investors to              It could serve as a watershed for               currently follow very similar investment
short the market or bet on a rise against           accelerating reforms to liberalise the          strategies, in part because of a lack of
the tide, futures, together with other              capital markets, gradually opening them         hedging tools, which limits the scope for
reforms such as a pilot programme on                up to greater inflows and outflows of           creating mutual funds or other products
short selling of stocks, should ease the            investment and eventually culminating in        that veer away from either betting on a
Chinese market's notorious volatility.              making China's yuan currency fully              rising market or safely stowing money in
                                                    convertible.                                    cash, Ba said.
If all goes smoothly, it could pave the
way for the gradual introduction of a               If it goes wrong, as some experiments           Index futures and the accompanying
range of other derivatives and products,            with reform have before, the whole              ability to short the market, or bet on falls,
from options to global exchange-traded              liberalisation project could be pushed          will open the way for institutions to
funds, that will be needed to realise the           back.                                           design other products, such as capital-
ruling Communist Party's stated goal of                                                             preservation funds.
building Shanghai into a global financial           After bad experiences with the
centre by 2020.                                     introduction of derivatives such as             Importantly, they should provide a
                                                    warrants, Beijing is taking few chances.        channel to divert selling pressure when
"Short selling together with index futures          Marked by high margin requirements and          the market is falling, promoting long-term
are probably the two most important                 other restrictions, few expect futures to       stability, said Gao Zijian, chief derivatives
pieces in the China capital markets                 make any major waves at first.                  analyst with Orient Securities in
toolbox," said Jerry Lou, China strategist                                                          Shanghai.
with Morgan Stanley in Hong Kong.                   Roughly 6,000 futures trading accounts
                                                    are expected to be opened by their

For editorial content, please contact:
Jason Subler, Shanghai Bureau Chief,

As investors increasingly seek
opportunities for arbitrage between
                                                CHINA STOCK INDEX
futures and the cash market, they will
expand the volume of transactions in the
spot market, improving liquidity, said
                                                FUTURES RISE ON DEBUT
Fang Shishen, formerly with Taiwan's
futures exchange and now an adviser at
Orient Securities Futures.

A limited pilot programme for margin
trading and short selling was launched
last month, and many analysts and
investors hope that more innovations,
like options, will follow in tandem with
greater openness to the outside,
eventually easing the tight restrictions on
foreign participation in the markets.

Bringing China more fully into global
markets would not only offer foreign
investors more opportunities to benefit
from its booming economy, on its way to
surpassing Japan as the world's second-
largest, but also help ease some of the
distortions caused by the current tight
capital controls, analysts say.


But the launch of the index futures on the                                                                                  Reuters Image
China Financial Futures Exchange on
April 16 is not without its perils,           By Jason Subler and David Lin                     shifted funds into the new market and
especially worries about low liquidity and                                                      away from the underlying shares.
heavy speculation.                            SHANGHAI, April 16 (Reuters) - China
                                              launched its first stock index futures on         The benchmark Shanghai Composite
Mutual funds, brokerages and insurance        Friday, a milestone in the development of         Index <.SSEC> closed 1.1 percent lower
companies, the very players who are           the country's relatively young financial          as property shares were hit by fresh
expected to bring greater stability, have     markets, with initial signs of a warm             government measures to cool surging
yet to see specific guidelines governing      welcome from investors hungry for new             home prices, including increasing
their participation.                          trading tools.                                    mortgage rates and down payment
Some observers also looked for                At an opening ceremony at the China
cautionary tales from China's stock           Financial Futures Exchange (CFFE) in              The CSI300 <.CSI300> index of the
warrants market, which often came to          Shanghai's financial district, officials          largest firms by daily turnover and
resemble a casino as low commissions          addressed investors and guests from               market capitalisation on the Shanghai
and huge price swings drew speculators        overseas exchanges, with red banners              and Shenzhen exchanges, on which the
who often made wild bets on hopelessly        on the walls proclaiming the occasion.            futures are based, also fell 1.1 percent.
out-of-the-money instruments.
                                              When the electronic board at the front of         Some analysts expect that index quickly
"Six months from now, heaven knows?           the room showed all four contracts rising         to replace the Shanghai Composite as
Index futures may have become just like       after the opening gong, the crowd grew            the benchmark now that the futures have
warrants," said Galaxy Securities analyst     loud with excitement.                             been launched, as investors focus more
Ren Chengde.                                                                                    on index heavyweights.
                                              "The last thing regulators wanted to see
But analysts said the tight initial           was too much volatility," said a manager          Plenty is riding on the success of the
restrictions showed the authorities'          at a futures brokerage. "Since prices did         futures market as China looks to expand
determination to achieve a stable start.      not fluctuate too much and the market             and deepen its financial markets and
                                              appeared to be going in the desired               attract more sophisticated investors
"I think a successful launch would be         direction, people were relieved."
mitigating risk, ensuring the system runs                                                       For one, futures are expected to give
smoothly," said Dean Owen, chief China        The nearest contract, to be delivered on          investors a vital tool for hedging, helping
representative for French futures             May 21 <CIFK0>, opened up 1.3 percent             to ease the wild swings that have
brokerage Newedge Group.                      from the base value of 3,399 points set           characterised Chinese markets in the
                                              for all the contracts. It fell back slightly in   past and making it possible for them to
"I would not expect huge volumes initially.   afternoon trade to close up 0.5 percent,          use a broader range of investment
That is not the priority. Once it is          at 3,416 points.                                  strategies.
launched, people see it's pretty smooth,
and there's no huge volatility...the          The rise in the futures, accompanied by
number should grow exponentially."            much higher than expected trading
                                              volume, contrasted with a fall in the spot
                                              share market, in part as some investors

                                                                                               Shanghai, Zhengzhou and Dalian was
                                                                                               130 trillion yuan ($19 trillion) in 2009, the
                                                                                               world's biggest commodity futures
                                                                                               market, with average daily turnover of
                                                                                               around 500 billion yuan.

                                                                                               The longer-term index futures contract
                                                                                               suggested investors remain confident
                                                                                               about the prospects for growth and
                                                                                               corporate earnings in the world's third-
                                                                                               largest economy, despite near-term
                                                                                               worries about overheating and potential
                                                                                               policy tightening.

                                                                                               In the cash market, immediate concerns
                                                                                               about tougher mortgage requirements
                                                                                               announced on Thursday weighed on
                                                                                               property shares.

                                                                                               Developer and construction firm China
                                                                                               State Construction Engineering Co
                                                                                               <601668.SS> fell 0.5 percent, and China
                                                                                               Vanke <000002.SZ> fell 0.8 percent.
About 70 percent of spot share market            Exchange officials have said in private
turnover comes from retail investors, who        that if the index futures proved to be a      Hong Kong shares also retreated on the
often end up following the crowd,                success, the next product -- options on       new property measures, with the Hang
increasing volatility, while most of the         the futures -- could be launched within a     Seng Index <.HSI> down 1.3 percent
wealthy individuals who currently                year.
dominate futures trading are relatively
experienced.                                     Equally important to the positive pricing
                                                 on the debut, the volume of futures
If things go smoothly, the futures could         trading surprised on the upside. With
herald the start of a fresh round of             58,500 lots traded in total for turnover of
innovation, leading to more products that        605 million yuan ($89 million), activity
will help the country's markets develop          was far greater than analysts had
towards becoming a global financial              expected.
centre, as the government aims to
engineer by 2020.                                "Such a debut gives us confidence that
                                                 the turnover of the index futures could
While the futures are currently not              reach roughly the same level as for
available to foreign investors, many are         China's commodity futures," said Liu
hopeful that Qualified Foreign                   Zhongyuan, chief economist at Xiangcai
Institutional Investors (QFII), who may          Qinian Futures in Shanghai.
participate in the capital markets through
a quota system, will be allowed in               Combined turnover of China's three
sometime soon.                                   commodity futures exchanges in

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  China country news: CN
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 SHANGHAI, April 15 (Reuters) - The Shanghai-based China               Minimum price change: 0.2 index points
Financial Futures Exchange (CFFE) will launch the country's first
stock index futures on April 16.                                       Daily limits: 10 percent up or down from previous settlement price.

The Shanghai Stock Exchange is the world's fifth-largest bourse,       Contract months: Delivery month; next month; and the two
with a market capitalisation of $2.6 trillion and average daily        subsequent end-of-quarter months
turnover of about 100 billion yuan ($14.65 billion).                   Trading time: Monday to Friday except public holidays.
                                                                                     9:15 a.m. to 11:30 a.m. (0115 to 0330 GMT)
But China has no major financial derivative products, leaving                        1:00 p.m. to 3:15 p.m. (0500 to 0715 GMT)
investors without hedging tools and limiting the country's pricing     Last trading/settlement day: Third Friday of the delivery month
power in the international arena.
                                                                       Delivery method: Cash delivery
China aimed to breathe new life into its stock market with the         Trading code: IF
establishment of the CFFE in 2006, although the launch of new          Reuters Instrument Code: <0#CIF:>
products has been delayed by the global financial crisis.
Following are details on the pioneering index futures contracts, as    TRADING REQUIREMENTS:
published on the exchange's website (          Individuals:
                                                                       - At least 500,000 yuan on deposit for margin requirements to
                                                                       open an account;
CONTRACT DETAILS                                                       - Pass relevant examinations on futures trading;
Underlying index: The CSI300 Index <.CSI300>, which is based           - Participate in mock trading in index futures for at least 10 days
on the 300 largest firms by daily turnover and market capitalisation   and conduct at least 20 mock transactions;
on the Shanghai and Shenzhen stock exchanges.                          - No record of serious violations of securities rules.

Unit: Index point                                                      Institutional investors:
                                                                       - At least 1 million yuan in net assets;
Contract size: 300 yuan times the level of the CSI300. Based on        - At least 500,000 yuan on deposit for margin requirements to
the index's Thursday close of 3,394.573 points, a single contract      open an institutional account;
would be worth 1,018,372 yuan ($149,200).                              - Employ professional futures trading personnel who have passed
                                                                       relevant examinations;
Minimum margin: 12 percent of the contract's value, meaning            - Participate in mock trading in index futures for at least 10 days
investors would have to put up more than 122,000 yuan to trade         and conduct at least 20 mock transactions. Alternatively, have
one contract at current index levels.                                  concluded at least 10 deals in commodity futures transactions over
                                                                       the past three years;
Trading unit: one lot, or one contract                                 - No record of serious violations of securities rules

  INDEX FUTURES COULD SPUR                                                                       as 130/30 funds and leveraged
                                                                                                 exchange-traded funds within two years,
                                                                                                 said Wei Zhiyu, analyst at Shenyin
  CHINA’S FUNDS INDUSTRY                                                                         Wanguo Securities Co.

                                                                                                 And for China's private investment funds,
By Samuel Shen and                                                                               which operate outside government
Edmund Klamann                                                                                   supervision and are estimated to be
                                                                                                 worth more than 100 billion yuan ($14.65
SHANGHAI, April 16 (Reuters) - China's                                                           billion), the derivatives will be an
launch of stock index futures is set to                                                          immediate boon.
provide a long-term boost to the
country's funds industry by fostering new                                                        "Index futures would make financial
investment products and maybe even a                                                             products more plentiful in China, where
homegrown George Soros.                                                                          investment channels are limited," said Ba
                                                                                                 Shusong, senior researcher at the State
Asia's second-largest economy has                                                                Council, China's cabinet.
embarked upon further liberalisation of
its financial markets even as Western                                                            "The short-term impact is limited, but
nations are heavily scrutinising the role                                                        over time the index futures will change
played by derivatives in causing the                                                             China's investment landscape."
financial crisis and are eyeing ways to
control their use.                                                                               China on Friday launched index futures -
                                                                                                 agreements to buy or sell an index at a
China is adopting a phased introduction                                                          given value on a future date -- along with
of the stock index futures, to ensure their                                                      margin trading and short selling of
orderly growth. Still, for the country's                                                         shares, to provide investors with tools to
$380-billion mutual fund industry, it                                   Reuters Image            manage risks in a notoriously volatile
would enable rolling out products such                                                           stock market.

All four of the index futures contracts
<0#CIF:> rose in active trading on their
first day, in an apparent sign that
investors are bullish about the long-term
prospects of China's stock market,
traders and analysts said.

The instrument will spawn new
investment strategies by institutions that
could grow into Chinese equivalents of
Soros Management Co, founded by
billionaire investor Soros, or Man Group
Plc, analysts said.

"Index futures will generate many
money-making models," said Wu
Guoping, who manages a private
management fund in the southern
Chinese boomtown of Shenzhen.
"Players in this market will become more
sophisticated and brainy."


China is particularly keen to build up its
mutual fund sector to broaden
investment opportunities for the country's
$4 trillion in household savings.
                                                                                                                      Reuters Image
Regulators, however, appear cautious in
allowing institutional participation in       overseas hedge funds but without             future more institutional investors being
futures trade initially.                      hedging tools.                               able to participate in index futures, like
                                                                                           banks and hedge funds."
Financial institutions, including mutual      Because they are not regulated by the
funds, brokerages and insurers, have not      government, these funds could become         Not everyone is enthused by the launch
yet been allowed to open index futures        the most active and innovative players in    of the futures.
accounts, leaving the market dominated        China's nascent index futures market.
by retail investors.                                                                       "Derivatives are a double-edged sword: If
                                              "There could be countless strategies         you bet the wrong way, you expose
Mutual funds will also be subject to tough    developed on the basis of index futures      yourself to more risk, not less," said
regulations once they are allowed access,     by such funds," said Tang Xuan, analyst      Chen Zhimin, head of investment at E
with draft rules capping the value of their   at the Shanghai Stock Exchange. "There       Fund Management Co. "We currently
long futures positions at 10 percent of       are many players outside who are eager       have no plans to trade index futures."
net assets and short positions at 20          to jump into this market."
percent of stock holdings.                                                                 Some said it may be better to wait before
                                              Foreign institutions are also keen to        participating.
In addition, funds can only trade the         trade index futures in China, according to
derivatives to hedge risks, not for           Dean Owen, chief representative in           "Liquidity is likely to be low in China
speculative purposes.                         China of Paris-based futures broker          initially due to a high threshold and
                                              Newedge Group.                               stringent risk control, so the time is not
"The pilot stages are designed to keep                                                     ripe for institutions to use complicated
potential risks and uncertainties to a        "Newedge customers all want to come to       financial tools," said Bai Youge, vice
minimum," said Evian Shi, analyst at          China," Owen said. "The door is opening      manager of Shenyin Wanguo Hong Kong.
fund consultancy Z-Ben Advisors.              gradually, and I think you will see in the

But index futures will prove a badly
needed tool for mutual funds to manage
risks, diversify products and build core
competitiveness, said Ti Yuntao, analyst
at Shenyin Wanguo Securities, who
hailed the innovation as marking a new
era for China's fund sector.


Index futures may also foster the
development of a genuine hedge-fund
sector in China.

Hundreds, possibly thousands, of private
investment funds currently operate in
China with structures similar to those of

                                                                                                    CURRENCY/EXCHANGE CONTROLS
                                                                                                    Although it maintains a peg to the U.S.
                                                                                                    dollar, Hong Kong imposes no capital
                                                                                                    controls and lets the HK dollar trade
                                                                                                    freely in international markets.
                                                                                                      In contrast, China's renminbi (RMB) is
                                                                                                    not fully convertible. The People's Bank
                                                                                                    of China manages the currency's value
                                                                                                    against a basket of currencies of key
                                                                                                    trading partners. Exchange controls
                                                                                                    restrict foreign investment flows in and
                                                                                                    out of the country.

                                                                                                    Most investors consider Hong Kong's
                                                                                                    regulatory system more independent and
                                                                                                    transparent than Shanghai's, where rules
                                                                                                    are more opaque and enforcement is
                                                                                                    While Hong Kong's financial markets
                                                                                                    regulator is an independent statutory
                                                                                                    body -- the Securities and Futures
                                                                                                    Commission (SFC) -- Shanghai's
                                                                                                    regulator is part of the government's
                                                                                                    State Council.
HONG KONG, Dec 10 (Reuters) - The Chinese government's plans to develop Shanghai                    LEGAL SYSTEM
into a global financial centre over the next decade are set to challenge Hong Kong's foothold       Hong Kong has an independent legal
as the region's financial hub. Yet in many areas the gap between the two remains wide.              system and all laws are governed by an
                                                                                                    autonomous constitution. English
CONCENTRATION OF FINANCIAL SERVICES                                                                 continues to be the only medium in which
                                                                                                    the majority of overseas judgements are
Hong Kong has a deeper pool of financial services than Shanghai with insurance, law,                reported.
accounting and other professional service firms already well established.
                                                                                                      In China, the National People's
                                                                                                    Congress has the power to enact laws
The services sector in Shanghai is expanding quickly but greatly lags Hong Kong with its
                                                                                                    and appoint the People's Courts. The
industrial sector still contributing 46 percent of economic growth compared with just 8             lack of an independent legal system can
percent in Hong Kong.                                                                               be a concern for foreign investors in
                                                                                                    getting a fair hearing.
Although Shanghai's stock market is worth more than Hong Kong's, with a market                      The income tax rate for people working in
capitalisation of $2.7 trillion compared with $2.3 trillion in Hong Kong, it has fewer listed
                                                                                                    Hong Kong is a flat 15 percent,
companies. Hong Kong Exchange trades 1,297 stocks versus 869 in Shanghai.                           compared with 45 percent in Shanghai.
                                                                                                      Hong Kong tax rates are low by OECD
Shanghai's exchange is more focused on retail investors -- 85 percent of the trading                standards and there are no capital gains,
involves retail, according to Tjun Tang of Boston Consulting Group. Without a large, stable         sales or VAT taxes. Taxes are also only
base of institutional investors, the market is subject to higher volatility. China is encouraging   levied on income made in Hong Kong.
more foreign institutional investors to participate, however.                                         Compared with the rest of China,
                                                                                                    Shanghai has lower taxes for foreign
FUTURES MARKET                                                                                      invested companies, but the city does
                                                                                                    have VAT, consumption, income and
Hong Kong has a mature and active financial futures market. It includes Hang Seng index             business tax.
futures -- which has over 11,000 contracts -- H Share index futures, interest rate futures and
gold futures which started trading last year.                                                       LITERACY AND LANGUAGE
  Shanghai doesn't yet trade financial futures. It does have an active commodities futures
                                                                                                     Hong Kong and Shanghai are both
market, though. It currently trades copper, aluminium, zinc, steel, wire rod, rebar, natural        highly literate societies, each with a
rubber, fuel oil and gold. It plans to launch stock index futures in the near future.               literacy rate of 94 percent. Cantonese
                                                                                                    and English are the official languages in
FIXED INCOME MARKETS                                                                                Hong Kong, but English is regularly
Hong Kong is far more active in global bonds than Shanghai, where international bond                spoken in the business environment.
trading is still very limited. Hong Kong sold $11 billion of G3 currency bonds in 2009              Mandarin is standard for business
compared with $982 million in Shanghai.
                                                                                                    dealings in Shanghai.
However, domestic currency trading in Shanghai far surpasses that in Hong Kong, with yuan
trading much higher than domestic trading of the Hong Kong dollar.

  CHINA MARKET HOPES FOR                                                                   upbeat outlook for the strongly
                                                                                           recovering economy and corporate
  BOOST FROM INDEX FUTURES                                                                 But the index began showing signs of life
                                                                                           in late March, rising decisively above the
                                                                                           125-day average for the first time in two
                                                                                           months as institutional investors tested
                                                                                           the waters with purchases of selected
                                                                                           large caps.

                                                                                           The index has since convincingly broken
                                                                                           free of that technical barrier and on
                                                                                           Thursday rose to its highest intraday
                                                                                           level in three months at 3,181.663 points.

                                                                                           FUTURE BENCHMARK

                                                                                           Analysts expect the index to move
                                                                                           mainly in a higher 3,150 to 3,350 point
                                                                                           range in the second quarter, paving the
                                                                                           way for a rally in the second half of the

                                                                                           "The economic trend is seen steadily
                                                                                           improving this year, fuelling strong gains
                                                                                           in corporate earnings, so the index
                                                                                           should see a slow bull move heading for
                                                                                           3,500 points in late 2010," said Zheng
                                                                                           Weigang, head of investment at
                                                                        Reuters Image      Shanghai Securities.

By Lu Jianxin and Edmund Klamann             Many market watchers had expected a           The key to a blue chip-driven rally,
                                             large cap-driven rally when the index         however, will be their relatively modest
SHANGHAI, April 15 (Reuters) - China's       futures plan was announced in January,        valuations, analysts said.
stock market bulls have waited a long        but an official clampdown on booming
time for a boost from the country's plans    bank loans ended up putting a damper          "The valuations of large caps, particularly
to launch stock index futures, and the       on the market and spurring worries over       banking stocks, have lagged far behind
pay-off is finally at hand.                  an earlier-than-expected exit from            the overall market," said Cao Xuefeng,
                                             China's economic stimulus.                    senior analyst at Western Securities in
The launch of futures trading on Friday is                                                 Chengdu.
tugging investor attention towards large-    New bank lending has now been reined
cap stocks, whose valuations have            in, however, with March data announced        He noted that the authorities' clampdown
lagged, helping to nudge the long-           on Monday coming in much lower than           on liquidity earlier this year capped the
wavering stock market into a bullish         expected, suggesting that the Beijing         supply of funds available to investors to
trend for this quarter.                      authorities have achieved their goal and      trade large-cap shares.
                                             can take their time in considering harsher
"Institutions have been buying more          monetary policy tightening such as            Components of the CSI300 Index
large caps this week, conducting a           raising interest rates.                       <.CSI300> , which covers the 300 largest
rehearsal for index futures trading. That                                                  firms by daily turnover and market
indicates the index should have more         That should help the Shanghai                 capitalisation on the Shanghai and
room to rise," said Chen Huiqin, senior      Composite Index establish firm support        Shenzhen stock exchanges, now have a
stock analyst at Huatai Securities in        at its 125-day moving average, a key          forward price earnings (PE) ratio of 15
Nanjing.                                     chart line used in the Chinese market to      times forecast 2010 earnings, compared
                                             delineate bullish and bearish territory and   with a Shanghai market average of 23
Futures will be based on the CSI300          which offered stiff resistance until it was   times.
<.CSI300> index of the most actively         breached late in the first quarter.
traded and highly capitalised shares on                                                    The CSI300, which accounts for 60
the Shanghai and Shenzhen markets,           "Historically speaking, around the world      percent of the markets' combined $3.7
instead of the broad-based Shanghai          the launch of index futures has typically     trillion capitalisation, will likely be quickly
Composite Index <.SSEC>, the current         heralded a bullish rather than bearish        elevated to replace the Shanghai
mainland benchmark.                          stock run," said Tan Wentao, head of          Composite as the Chinese market
                                             research at HNA Futures in Shanghai.          benchmark, in line with a global trend of
This will make market heavyweights a                                                       using blue-chip indexes, as index futures
stronger magnet for investor interest,       The composite index spent most of the         boost turnover in index heavyweights.
which now often gravitates toward            first quarter between 2,950 and 3,100
speculation in small-cap shares that are     points, below its 125-day average which       "The index futures are expected to lead
favourites with retail investors.            now stands at 3,125 points, as fears over     to a fundamental change in the Chinese
                                             an imminent normalisation of China's          market. Trading will no longer focus on
                                             ultra-easy monetary policy offset the         small caps as it does now on many
                                                                                           days," said Huitai's Chen.

                                                                                              Until such changes come through,
  WHY SHANGHAI NEEDS NEW                                                                      however, many aspects of Shanghai's
                                                                                              financial markets won't develop quickly.
                                                                                              Consider the importance of index futures.
  FINANCIAL PRODUCTS                                                                          Shanghai set up the China Financial
                                                                                              Futures Exchange three years ago to
                                                                                              prepare for the introduction of index
                                                                                              futures, cash-settled futures contracts on
                                                                                              the value of stock market indexes. The
                                                                                              plan has been held back, though, along
                                                                                              with proposals for margin trading and
                                                                                              short selling.

                                                                                              "These are very fundamental tools,
                                                                                              without which the only thing you can do
                                                                                              when stock prices are excessively high is
                                                                                              to sell," said Gao Zijian, analyst at
                                                                                              Oriental Securities Co. "Long-term
                                                                                              investors such as funds need such tools
                                                                                              to hedge risks, especially in China's
                                                                                              volatile market."

                                                                                              In addition to helping the market price
                                                                                              securities more efficiently, the change
                                                                                              would help create a domestic hedge fund
                                                                                              industry that could be worth trillions of
                                                                                              yuan, said Tang Xuan, an analyst at the
                                                                                              Shanghai Stock Exchange.

                                                                                              China's interbank market also lacks
                                                                                              financial tools to help companies
By Samuel Shen                                 financial centre by 2020, sending a clear      manage foreign exchange risks. That
                                               signal that there's little time to lose in     matters because as Chinese companies
SHANGHAI, Dec 8 (Reuters) - Last               deregulating capital markets.                  venture abroad, their currency risk
January, China's Pure Heart Asset                                                             increases. Those risks could be better
Management Co took a radical step to           "China should introduce a basic set of         managed with yuan options, which would
guard itself against a possible crash in       derivatives by 2015, and spend the next        give companies the right to buy foreign
China's domestic A-share market,               five years increasing liquidity, sorting out   currencies at a pre-agreed exchange
liquidating all of its five domestic funds.    problems and improving rules and               rate on a specific date.
                                               regulations," said John Tan, China head
But the privately managed firm took a          of Global Markets at Standard Chartered.       In the bond market, China could help
different tack with its Hong Kong-based                                                       develop derivatives by easing
hedge fund, choosing to keep the               Those derivatives include options and          government control on interest rates,
operation open. The reason, said a             swaps in bond and foreign exchange             thus giving market players more
company spokesman, was partly                  markets and margin trading and short           incentive to hedge risks, Standard
because it was able to use financial           selling in the stock market.                   Chartered's Tan said.
instruments unavailable on the mainland.
                                               STILL WAITING                                  Despite efforts to liberalise interest rates,
The firm has since opened a second                                                            loans are still priced according to
fund in Hong Kong and has shifted its          The global financial crisis is one reason      benchmark rates set by the central bank,
headquarters to the former British colony.     market participants haven't seen such          rather than by the interbank market,
                                               products yet. The role of complex              which partly explains sluggish trading in
Pure Heart's move underlines one of the        derivatives in last year's financial train     the domestic interest rate swap market.
factors behind Hong Kong's strength as         wreck has made Beijing wary.
an international financial hub -- the                                                         "One doesn't need to hedge risks if
availability of risk-mitigating derivatives.   Street protests by Chinese investors who       interest rates are set by the government,
Shanghai, for the most part, lacks these       lost money on a Shanghai-listed warrant        so you need to give more power back to
tools, a major shortcoming as                  product last year also triggered fears that    the market to develop IRS," Tan said.
sophisticated investors seek to manage         fast-paced innovation would lead to
risks in the country's increasingly open       social unrest.                                 Richard Wu, Hong Kong-based portfolio
and volatile financial markets.                                                               manager of RCM, a unit of Allianz Global
                                               "The financial crisis has stopped a lot of     Investors, agrees. "If you look at
"If you're building a wooden house,            things, because China is rethinking its        financial centres such as Hong Kong or
simple tools are enough," said Joseph          model after the Western systems in the         Singapore, really successful innovations
Ho with French bank Societe Generale           U.S. and Europe probably failed in many        and derivative products are not directed
(SocGen) in Hong Kong. "But if you             aspects," said Pascal Sefrin, China head       by the government," Wu said.
construct a skyscraper, you need more          of corporate and investment banking at
advanced equipment."                           SocGen.                                        "The government's role is to build a good
                                                                                              infrastructure, but the last thing it should
China's central government vowed in            Until such changes come through,               do is to tell people what to do and when
March to make Shanghai a global                however, many aspects of Shanghai's            to do it."