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China considering stock index futures: sources

SHANGHAI: China is considering the launch of stock index futures after lobbying from big institutional investors, securities industry officials said on Monday.

The launch of the instrument was aimed at giving big institutional investors a way to hedge against risk as China's stock market expanded, they said.

China's futures contracts are now limited to agricultural products and other commodities.

There have been no financial futures since the government banned treasury bond futures in 1995 following a price-rigging scandal.

"Measures to ensure the successful launch of index futures are being considered," said an executive at a major Chinese securities firm.

"But as China lacks experience in handling riskier securities derivatives, the initial timetable was set a bit later."

China has set an "initial" target of late this year or early next year for introducing index futures, but it could be later, industry officials said.

Officials of the China Securities Regulatory Commission (CSRC) and China's two stock exchanges in Shanghai and Shenzhen declined to comment.

The CSRC met industry officials in November to hear their proposals on stock index futures, the industry sources said.

MARKET WATCHDOG UNDER PRESSURE: The market watchdog was under pressure to allow the product from mutual funds, which Beijing is counting on to help foster a class of institutional investors and stabilise the volatile market, they said.

"Institutions have complained about incomplete investment vehicles, in particular a lack of hedging instruments," said Zhang Lan, an analyst at Shenyin & Wanguo Securities.

"High risk derived from a lack of hedging is deterring institutional investors."

China has allowed the establishment of major mutual funds since last year. There are now 20 funds, each valued at 2.0 billion to 3.0 billion yuan ($242-$362 million).

The combined capitalisation of the Shanghai and Shenzhen stock markets was close to 3.0 trillion yuan, and the growing size had led mutual funds and institutional investors to call for stock futures, industry officials said.

But the government worried such futures would become the target of speculation, which has made regulators hesitant about giving the go-ahead, they said.

The sources said the government was considering measures to deter speculators, including high margin requirements of 30 to 40 percent for stock index futures.

China's Securities Law, which went into effect in July last year, bans stock futures and legislators would also have to amend the law, they said.

The government aimed to avoid a repeat of a 1995 incident in which the former Wanguo Securities Co lost one billion yuan trading bond futures as it tried to rig prices to reverse a market plunge after it bet heavily on a rise.-Reuters