China to start index futures, margin trade

China approved stock index futures, giving investors a tool to protect against losses and profit from any declines in a market that rose 80 per cent last year.

The government also approved margin trading and short selling, the China Securities Regulatory Commission said in a statement on its Web site today. It may take three months to complete preparations for index futures, the regulator said.

Index futures, agreements to buy or sell an index at a preset value on an agreed date, may help ease fluctuations after the Shanghai Composite Index doubled in 2007, then slumped 65 per cent in 2008 before rebounding last year. Until now, Chinese investors could only profit from gains in equities.

“This is a milestone in the development of China’s capital markets,” said Wang Yihuan at Beijing-based China Asset Management Co., which oversees more than $37 billion as the nation’s largest fund manager. “Investors finally have the tools to hedge or speculate and that will help all types of market participants to become more sophisticated.”

Index futures are part of China’s push to make more investment options available in the world’s third-biggest stock market by value. The limited scope of securities to trade has contributed to boom-and-bust cycles in China’s stock and property markets.

The first stock index contracts, based on China’s CSI 300 Index, may begin trading after the Communist party’s annual congress in March, an official with knowledge of the matter said earlier.

The CSI 300, which tracks the 300 biggest stocks traded in Shanghai and Shenzhen, rose 0.3 percent today to close at 3,480.13. The Shanghai Composite Index added 0.1 per cent.

Rules for the index futures will deter participation by retail investors, said Jing Ulrich, Hong Kong-based chairwoman of China equities and commodities at JPMorgan Chase & Co.

Investors will be required to put up 10 per cent of a contract’s value to buy, sell or short CSI 300-based futures as collateral, according to rules published on China Financial Futures Exchange’s Web site in 2007. The bourse has been conducting mock trading in the securities since October 2006.

The value of the futures contracts will be points of the CSI 300 multiplied by 300 yuan, according to the trading rules the exchange set.

Investors will need to spend 105,000 yuan ($15,379) to buy a single futures contract when the CSI 300 is at the 3,500 level, establishing a “cost barrier to retail participation,” Ulrich wrote in a note distributed after the announcement.

“These initiatives will provide tools for institutional investors to hedge risks and should reduce market volatility in the long-term,”, she said.

Citic Securities Co, China Merchants Bank Co, Ping An Insurance Group Co, Industrial Bank Co and Shanghai Pudong Development Bank Co. are the most-heavily weighted stocks on the CSI 300.

“The launch of index futures is positive for the market,” said Zhang Xiuqi, a Shanghai-based strategist at China International Fund Management Co, which oversees about $10.2 billion. Zhang said stocks with large market capitalizations will be boosted because they’re heavily weighted in the index.