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Derivative transaction will be important part of China's financial market: expert

Updated: 2010-03-27 14:24
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CHICAGO - Derivative transaction will become an important part of China's financial market in the future, said a financial expert on Thursday in Chicago.

Eugene Zheng, Managing Director of Asia Affairs at Chicago Board Options Exchange (CBOE), made the statement during his speech titled "The financial industry in China: the present and the future" delivered at the distinguished speaker series event sponsored by Chinese Finance Association of America (CFAA), a not- for-profit organization committed to promoting educational and cultural exchange among finance professionals between the United States and Greater China.

Zheng said: "The current situation of China's financial market is at a similar level of the US financial market in the 1980s. The derivative transaction market, for example, stock index futures, is still at its budding stage. The swappers and investors are not familiar with the process of utilizing lever strength to maximize capital benefit within a reasonable scope. There are still certain barriers between the Chinese financial market and global financial market."

He further explained, "in the US, currently derivative market has gradually achieved the same important position as the stock market," noting that the New York Stock Exchange's income from derivative has surpassed its income from stock transactions.

Stock index future, which will be launched in China soon, is only the simplest type of financial derivatives. Derivative transaction may decompose and dodge risks, enhance the quantification degree of transactions, and promote the flow of information, Zheng said.

In addition, "derivative transaction can help reduce the fluctuation of the stock market, enhance the market effectiveness, and cultivate a group of market trading experts who truly depend on information transaction. To certain extend it may eliminate the abnormal transactions based on insiders' information. Therefore, it is beneficial to the value discovery and healthy development of China's stock market," the financial expert added.

He said: "China needs its own derivative market. It needs to cultivate and establish its own organizations that can deal with two different kinds of financial systems. China also needs top tier talents who are capable of integrating the two systems."

Regarding the current financial risks China is facing, Zheng said: "Some critical problems facing by foreign countries during their current financial reform do exist in China as well, for example, the monitoring of OTC and the situation that some financial entities become 'too big to fall.' Especially for OTC, its transaction is growing larger and larger. However, there are still no national legislation and monitoring departments to control it. Within the organizations and enterprises, there are still no qualified risk management staff, backstage service and accounting guidelines."

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He warned: "Once risk is bred, it will bring massive loss to the national property and the financial management system."

Zheng is a guest analyst on economy for China's Xinhua News Agency, and contributes to major financial journals in China including the China Securities Daily and Futures Daily. He has translated four options books into Chinese, including Larry McMillan's McMillan on Options and Options as a Strategic Investment and Options: Essential Concepts and Trading Strategies by CBOE's Options Institute.