China to open derivatives bourse to foreigners

SHANGHAI (Reuters) – China is likely to open the gates of its new derivatives exchange to foreigners next year to attract trading volume and allow investors to hedge their mainland stock investments.

Liu Zhongyuan, vice president of Topwin Futures Co. in Shanghai, said in an interview for the Reuters China Century Summit that the exchange is expected to allow foreign access through China’s qualified foreign institutional investor, or QFII, program.

China’s regulator is also likely to give the green light to QFIIs to enter into the country’s commodities futures markets next year, he said.

“There will be a breakthrough in allowing QFIIs into the Chinese futures markets next year,” Liu told Reuters in an interview at his Shanghai office on Thursday.

The Shanghai Financial Derivatives Exchange, to be formally launched on Friday, will offer futures based on an index of the 300 largest companies traded on the Shanghai and Shenzhen exchanges by year-end, said Liu, who helped set up the bourse.

Currently, investors holding QFII quotas are not allowed to trade in China’s futures markets. But they can trade stocks and bonds.

Mock trading of stock index futures will next week, although actual trade is not expected until later this year.

China currently has two stock exchanges in Shanghai and Shenzhen and three futures exchanges for commodities.

The value of open interest on the new exchange could reach 120 billion yuan within a year of operations, Liu said.

“It will certainly attract the attention of global derivative markets,” Liu said.

The index futures will be based on the Shanghai-Shenzhen 300 A-share index, whose companies currently account for 80 percent of turnover on the two exchanges and 60 percent of the $620 billion market capitalization of the two bourses.

“The new exchange will consider opportunities for launching index options after the index futures trading starts,” Liu said.

Although the new exchange has not yet started derivatives trading, it is already faced with outside challenger.

The Singapore Stock Exchange SGXL.SI has launched a futures contract based on a Chinese A-share index. The index, complied by FTSE/Xinhua Index, consists of the top 50 Shanghai- and Shenzhen-listed stocks by market capitalization.

Shanghai Stock Exchange data management unit SSE Infonet Ltd. is suing FTSE/Xinhua Index, alleging violation of intellectual property.

An industry veteran for more than a decade, Liu, penned a strongly-worded article in the influential China Securities Journal against the Singapore initiative last month. He struck a more conciliatory note on Thursday.

“It is understandable that Singapore needs to expand its markets, prompted by commercial needs,” said Liu, 52.

“The fundamental problem is that China’s markets are still half-opened so far, so the Singapore futures could incite domestic investors to go through grey channels to trade there.”

China’s futures industry needs all the help it can get. China’s futures brokerage industry, with more than 180 firms — similar to the number in the United States — makes up just 0.2 percent of the country’s economy.

“China’s futures market has been depressed for more than a decade,” Liu said. “It is treated as a naughty boy always making trouble and that has caused the markets to be underdeveloped.”

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