China's Stock Markets Enter New Era

Market, page 17, issue 452, Jan 11, 2009
Translated and edited by Liu Peng
Original article: [Chinese]

This article is not a direct translation from the Chinese original, some extra details that were announced after publication have been added.

Major reforms to China's financial system are set to be introduced over coming months with the country's securities watchdog finally giving approval for trading to begin on the country's first stock index futures exchange and securities companies also being given permission to introduce margin financing services.

China Securities Regulatory Commission (CSRC) announced on Tuesday that it was giving the China Financial Futures Exchange (CFFEX) permission to fire up the stock index futures market that has been waiting to get the green light since it was established in 2006.

The State Council first gave in principle support to the establishment of a stock index futures market over three years ago and the CFFEX was established as a domestic home for stock derivatives trading in Shanghai in September 2006.

According to CFFEX's website, over the past three years, they have been "working on the product design, making rules and all kinds of technical preparations as well as investor education." The exchange also engaged in mock trading as it awaited official approval from the State Council.

The decision to go ahead with a domestic futures market was made just four days after the CSRC announced that the State Council had approved a scheme that would allow securities companies to introduce margin financing services and also allow China's stock exchanges to launch index futures.

The CSRC also revealed that the minimum capital requirement for registering a futures trading account would be provisionally set at 500,000 yuan.

The CSRC said it would be in charge of preparations for the establishment of the stock derivatives exchange: overseeing investor screenings, clarifying policies on the participation of institutional investors, examining stock index futures contracts, training brokers from securities houses and also opening accounts for all retail investors.

It also predicted that this preparatory work would take approximately three months to complete.

An anonymous manager in charge of derivatives trading at a large domestic securities company, told the EO that the introduction of margin financing services marked a new era for China's stock market.

The new service would allow investors to borrow cash from securities brokers in order to buy securities or alternatively borrow equities from securities brokers in an attempt to profit by short selling.

At present, investors in China's domestic stock markets can only profit by betting on rising stock prices.

The CSRC said it would select securities brokers with a history of strong performance to spearhead the margin financing project and after that would gradually expand the scope of the scheme.

According to a research report issued by Shenyin & Wanguo Securities Company, the eight stock broking companies most likely to be allowed to pilot the scheme would be: Citic Securities, Guosen Securities, China Merchants Securities, Haitong Securities, GF Securities, Guotai Jun'an Securities, Shenyin & Wanguo Securities and Everbright Securities.

Links and Sources
China Financial Futures Exchange (CFFEX) Official Website
China Securities Regulatory Commission: Announcement
Economic Observer: 500,000 Yuan Threshold (Chinese)
China National Real Estate Group: Image