Hasty actions could stifle innovation

China is making rapid progress in the development of new markets for a variety of financial instruments. The gold futures market began operations in January and the China Financial Futures Exchange is in the final stage of preparation for the launch of the long-awaited stock index futures market. Talks are reportedly underway for the introduction of stock options and other financial derivative products.

The financial community and the investment public have placed high hopes on these developments which promise to open up the opportunity for financial innovation to achieve greater flexibility and efficiency in the use of capital. By bringing down the cost of funds through risk transfers, financial innovation can help enhance economic growth potential, maximize investment returns and improve risk management.

Despite the huge potential benefits it could bring, financial innovation, as a concept, has been brought into question by the fall out of the subprime mortgage troubles that are threatening to drag the US economy into a recession.