Eas­ing in in­dex fu­tures seen as key to liq­uid­ity

China Daily (USA) - - BUSINESS - By CAI XIAO in Bei­jing caix­iao@chi­nadaily.com.cn

China’s stock mar­ket reg­u­la­tor should con­sider re­lax­ing re­stric­tions on trad­ing in in­dex fu­tures, to im­prove liq­uid­ity in the A-share mar­ket and help pre­vent sys­temic risks, ex­perts said.

“It’s now widely rec­og­nized that trad­ing in stock in­dex fu­tures was not re­spon­si­ble for the A-share mar­ket slump last year. In fact, the in­dex fu­tures mar­ket helps pre­vent risks,” saidMaWenya, gen­eral man­ager of Sun­day Fund Co Ltd, which man­ages as­sets worth 300 mil­lion yuan ($45.2 mil­lion).

In July last year, the China Fi­nan­cial Fu­tures Ex­change, where three stock in­dex fu­tures con­tracts are listed, an­nounced it will adopt a sys­tem of dif­fer­en­ti­ated charges based on trad­ing vol­umes, to make spec­u­la­tion in in­dex fu­tures costlier.

Ef­fec­tive Sept. 7 last year, the CFFEX had raised the trans­ac­tion fee for clos­ing a po­si­tion on ev­ery fu­tures con­tract to 0.23 per­cent of the deal value from 0.015 per­cent. This led to a sharp re­ac­tion: the daily trans­ac­tion vol­ume de­creased 92 per­cent to just 76,100 con­tracts.

Ma said the mar­gin ac­counts of three stock in­dex fu­tures con­tracts were small last year. They could not pos­si­bly have caused the A-share mar­ket to plum­met.

Agreed Hong Hao, manag­ing di­rec­tor and chief strate­gist at BOCOM In­ter­na­tional Ltd. He said the main rea­sons for the stock mar­ket slump last year were high val­u­a­tions of stocks and the use of high lever­age in stock trad­ing. And these were not at all re­lated to trad­ing in stock in­dex fu­tures.

The main func­tion of stock in­dex fu­tures is hedg­ing, which helps sta­bi­lize the mar­ket, said Ma.

A hedge is an in­vest­ment po­si­tion in­tended to off­set po­ten­tial losses that may be in­curred by a com­pan­ion in­vest­ment. For ex­am­ple, a fund man­ager will buy stocks in the A-share mar­ket, and have short po­si­tions in the stock in­dex fu­tures to lower risks.

“As the (A-share) mar­ket is now steady, I think it’s a good time to ease the re­stric­tions on trad­ing in in­dex fu­tures,” saidMa.

Hong echoed Ma’s view. “Trad­ing in stock in­dex fu­tures plays an im­por­tant role of hedg­ing risks in the mar­ket. In my opin­ion, eas­ing of re­stric­tions is nec­es­sary now.”

There is an­other rea­son why eas­ing is nec­es­sary now, said Ding Shengyuan, a manag­ing di­rec­tor at Galaxy Se­cu­ri­ties. It would help de­velop China’s wealth man­age­ment in­dus­try.

“Chi­nese peo­ple have ac­cu­mu­lated much wealth and trad­ing in stock in­dex fu­tures can lower the risks of funds. The quan­ti­ta­tive hedg­ing prod­ucts can be­come good wealth man­age­ment prod­ucts,” said Ding.

Ma said if the Chi­nese stock mar­ket reg­u­la­tor re­laxes re­stric­tions on in­dex fu­tures, hun­dreds of bil­lions of yuan at least will likely flow into the A-share mar­ket, im­prov­ing its liq­uid­ity.

de­crease in daily trans­ac­tion vol­ume since Sept 7 last year

Mar­ket-peo­ple are hop­ing the CFFEX will con­sider their plea and re­duce the trans­ac­tion fee.

“My (Sun­day Fund) eq­uity po­si­tion in the stock mar­ket is light now. But, if the re­stric­tions on in­dex fu­tures are eased, I’d in­crease my al­lo­ca­tion of funds to the stock mar­ket to about 90 per­cent,” saidMa.

Hong of BOCOM said the reg­u­la­tor’s con­cern now may be that if the re­stric­tions are eased, it could be wrongly in­ter­preted by some as the re­turn of high lever­age.

The CFFEX said on Thurs­day that it is fine-tun­ing rules and reg­u­la­tions so that trad­ing in stock in­dex­fu­tures­can­playan­im­por­tant role in the­mar­ket. But it de­nied it is about to ease re­stric­tions.

Hong said trad­ing in the US stock in­dex fu­tures was sus­pended for sev­eral months in 1987 af­ter a stock mar­ket crash, but it was re­sumed later, af­ter it was es­tab­lished there was no link be­tween the two.

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