Foreign investors will be able to trade China's new stock index futures within two or three years, according to Leo Melamed, chairman emeritus of CME Group Inc, the world's biggest futures exchange.
The China Securities Regulatory Commission said last week that it will allow trading of Chinese stock-index futures, agreements to buy or sell an index at a present value on an agreed-upon date. The regulator has yet to release details on who will be allowed to trade the futures.
Index futures are part of China's push to make more investment options available in the world's third-biggest stock market by value. China restricts overseas investors to buying so-called B shares that trade in US dollars in Shanghai and Hong Kong dollars in Shenzhen. Yuan-denominated shares are limited to Chinese citizens and approved overseas investors under the qualified foreign institutional investor, or QFII, program.
China may also expand bond market trading in the next two to three years "if everything goes smoothly" with stock index futures, Melamed said in Chicago, following a Bloomberg Television interview. Melamed advises China's regulators on the creation of its futures market.
Foreign institutions may also be allowed to trade index futures using a portion of their QFII quota, according to Jing Ulrich, chairwoman of China equities and commodities at JPMorgan Chase & Co in Hong Kong.
The nation's stock watchdog approved 94 foreign institutions, including Abu Dhabi Investment Authority, Deutsche Bank AG, and Goldman Sachs Group Inc, as of the end of 2009 to buy bonds and stocks in China. The nation's currency regulator, the State Administration of Foreign Exchange, grants a quota to QFIIs and has set the total quota at $30 billion.
Index futures may help ease volatility after the benchmark Shanghai Composite Index doubled in 2007, slumped 65 percent in 2008 and rebounded last year. Until now, Chinese investors could only profit from gains in equities.
The first stock index contracts, based on China's CSI 300 Index, may begin trading after the annual National People's Congress meeting in March, an official with knowledge of the matter said earlier this month.
Stock index futures are agreements to buy or sell an index at a preset value on an agreed date. 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.
The China Financial Futures Exchange plans to increase the amount of money investors must set aside to trade stock index futures to 12 percent of the contract value from 10 percent, the Shanghai Securities News reported on Jan 12.
The exchange will also limit the number of contracts for the same settlement date an investor can hold to 100, according to the newspaper.