The China Financial Futures Exchange (CFFEX) is on the verge of launching the widely anticipated futures on the CSI 300 index of leading Shanghai and Shenzhen stocks in the second quarter of this year.
According to a posting on the China Securities Regulatory Commission’s website on January 8, it may take three months to prepare for the launch.
Yet that belies the real time it has taken to develop this product. It was back in December 2001 that the then director of the CSRC’s futures division announced preparations were under way to launch an equity index future.
In January this year, more than eight years later, CFFEX was granted “in principle” approval by the State Council to launch its long-planned CSI 300 Index Futures. These have been trading in mock conditions at CFFEX since October 2006.
The exchange will also hold a pilot project in which a select few securities companies can begin offering short selling and margin financing.
Too long?
This may seem like an unduly lengthy process. But the authorities are being justifiably cautious, not just about launching this product, but also in the pace at which China opens up and relaxes capital controls.
The futures industry in China has been around since the early 1990s, but in the initial phase regulation could not keep pace with the market’s dramatic growth.
At the peak, there were 40 exchanges, controlled by local governments, offering a host of financial and commodity futures. But system abuse led to a series of reforms, which ultimately shifted control to central regulatory authorities.
It was a scandal involving bond futures in 1995 that led to the first wave of reforms, aptly entitled The Notice of Firmly Curbing the Blind Development of the Futures Market. The authorities closed down most of the exchanges and many futures brokers went out of business.
Today, there are just three exchanges offering commodity futures, as well as the financial derivatives exchange-in-waiting, CFFEX.
The authorities’ careful steps towards restarting a financial derivatives market are a clear demonstration that they do learn from history and are now taking every precaution when introducing new regulations and products.
Instruments considered for launch pass through stringent feasibility studies so that regulators can assess their potential impact on the stable and sound growth of the capital markets.
Patience is a virtue
There are numerous calls, especially from the international community, for China to open up and relax capital controls. China certainly understands these arguments, but Westerners should not expect everything to happen in one big bang.
It is a delicate process and the West must start trusting the Chinese to do things at a pace that will not disrupt their social and economic stability during this high growth period.
The CSRC website clearly states that “investor protection is our top priority” and that “the maintenance of a fair and efficient market is our unshaken responsibility”.
Seven of the top nine executives at the CSRC hold PhDs. They appear to take their responsibilities seriously.
For example, the CSI 300 future has been constructed with a fairly high notional value, to discourage mass retail participation.
It will be worth the value of the CSI 300 index (currently 3,150) multiplied by Rmb300, making a sum today of Rmb945,000 ($138,000).
At present levels, users will have to place more than Rmb108,000 ($15,800) with a domestic futures broker just to cover the margin guidelines required by the exchange to buy just one contract. Bear in mind that the average annual income for China’s urban workers is just shy of Rmb40,000.
Individual investors will also be required to pass an exam in order to trade. They will need to demonstrate a complete understanding of the contract trading mechanism and risks involved.
Heavy responsibility
The CSRC, which regulates both the securities and futures markets, has its work cut out. With its emergence as a global economic power, China understands that with power comes responsibility.
Perhaps more than ever, the world today needs a strong China with deep and developed financial markets. And China is stepping up to the plate with market initiatives and industry reform. In many ways, China is providing buoyancy to stop the world from sinking further into the depths of recession.
The financial market reforms in China are benefiting both local and foreign market participants.
The Chinese futures markets grew at 81.5% in 2009 from the year before. As China continues to reform its financial markets, taking a measured approach to development, the outlook for the industry looks bright.
Newedge operates a joint venture in China with CITIC. The entity, CITIC Newedge, is a member of the three commodity futures exchanges and the China Financial Futures Exchange.