Wealthy traders fuel mania for Chinese financial futures
By Robert Cookson 2010年04月29日 14:36 PM
 
Chinese investors love new financial products. Their passion, at times bordering on mania, explains why Shanghai stocks rocket in price on their trading debuts and why local equity funds can raise billions of renminbi on the day they launch.

But even seasoned market professionals have been surprised by the enthusiasm with which investors have embraced stock index futures – China's first financial futures since the mid-1990s – following their launch two weeks ago.

“The volumes have exceeded everyone's expectations,” says Dean Owen, Shanghai-based chief representative for Newedge, the French futures brokerage, which has a joint venture with Citic Group in China.

Indeed, on Tuesday last week, the third day of trading, the value of stock index futures traded on the China Financial Futures Exchange exceeded the value of stocks traded on the Shanghai Stock Exchange.

The first index futures, agreements to buy or sell an index at a given value on an agreed date, are based on the CSI 300 index, which tracks the Shanghai and Shenzhen markets. The initial contracts are for May, June, September and December.

Each contract is worth Rmb300 ($44) times the value of the index. That means the May contract, which has been trading around the 3,200 level, costs about Rmb960,000. Nearly 140,000 of these contracts were exchanged on Tuesday, worth a combined Rmb134bn.

The surge in trading volumes is all the more remarkable because Beijing has imposed rules to keep inexperienced investors out of the market. Investors must pass an examination and meet tough criteria for educational background, credit history, monthly salary and liquid assets.

Despite these controls and more than three years of preparations, the market has not started in quite the way regulators had hoped. Rather than being a place where institutional investors hedge stock portfolios, the market is a playground for wealthy speculators.

“The market is dominated by retail investors at the moment, which is something regulators and the exchange want to avoid,” says Mr Owen. “It is clear retail investors are not using the futures as a hedging tool against their stock portfolios.” Wealthy people from Zhejiang province, many of them seasoned commodity futures traders, comprise more than half of the stock index futures market, he says.

The short-term, speculative nature of the market is illustrated by the fact that more than 90 per cent of trades are opened and closed on the same day, a kind of rapid-fire trading for profit known as scalping.

On Tuesday this week, for example, investors traded 140,000 May-dated contracts. However, fewer than 7,400 contracts were left open at the end of the day. In western futures markets, so-called “open interest” is typically higher than daily trading volumes.

“We're still in the ‘new thing' excitement period,” says Jerry Lou, China equity strategist at Morgan Stanley. “The market will mature in the mid to long term, but for now it will be more of a greater-leverage way to play the market than a hedging tool.”

This may be why the China Securities Regulatory Commission released guidelines on Friday that allowed domestic securities companies and mutual funds to trade the stock index futures, but only for hedging rather than speculative purposes.

The CSRC also said it would soon unveil regulations for qualified foreign institutional investors to trade index futures. Such a move would give foreign funds a tool for hedging against downturns in China's volatile stock market, which has fallen 11 per cent this year.

The trouble, industry experts say, is that the stock index futures currently have a life of their own and reveal little about the direction of the underlying stock market.

One investor describes the futures market as the “biggest casino” in China. Rather than being a source of stability, he says, it will only increase volatility in the wider market.