The long-awaited futures market of financial derivatives will be located in Shanghai, where one of China's two stock exchanges is situated.

 

Specialists, as well as senior officials of China Securities Regulatory Commission (CSRC), all flew in to town to discuss details of preparation for inaugurating the new market shortly after the traditional Spring Festival ended earlier this month.

 

CSRC Chairman Shang Fulin said China has been experimenting extensively with financial capital trading in the past decade and has obtained sufficient experience for developing financial futures.

 

"With the planned expansion of reforms in the split share structure, market-oriented interest rates, the exchange rate system, the floating of prices for various financial assets will be more frequent, so market makers are in desperate need of relevant price finding and risk control tools," said Shang, who believed the past experiments have created conditions for development of financial futures.

 

According to Shang, China has seen a rapid growth in commodity futures trading on the Chinese mainland, an improvement in the supervisory capabilities via standardized development in the recent years.

 

"Market risks are predictable and are under control as well," said Shang. "We have amassed experience for developing financial futures through the stable trading of bulk commodities such as cotton, fuel oil and maize."

 

Jiang Yang, general manager of Shanghai Futures Exchange (SFE), said history and practice have proven that a futures market of financial derivatives follows logically from futures trading on commodities and commodity derivatives.

 

"The market dealers have developed a complete set of unique mechanisms for trading, settlement and risk control, and gained rich experience on the international market, in addition to the presence of a solid market foundation and stable systematic foundation," said Jiang.

 

Zhang Yujun, general manager of Shenzhen Stock Exchange, contended that as an emerging capital market, China should focus its futures trading on equity-based derivatives, instead of a commodity-exchange rate-interest rate-equity derivative mode, the normal development pattern for sophisticated markets.

 

"The capitalization of the capital market on the Chinese mainland has exceeded three trillion yuan (US$369.92 billion), and the systematic fluctuations of the market have remained relatively big, institutional investors such as investment funds and securities companies badly need equity-based derivatives in order to carry out management over assets," said Zhang.

 

Cheng Siwei, vice chairman of the Standing Committee of the National People's Congress (NPC) and a venture capital specialist, said the financial sector had weak competing power on the international market for lacking experience in using financial tools to dodge risks.

 

"China's financial sector will be facing challenges in terms of efficiency and the capabilities of responding to risks following the expansion of financial globalization," warned Cheng.

 

Cheng suggested the new financial derivatives futures market start with futures trading on stock indexes, followed by futures trading of the market-oriented interest rates, the exchange rates, and swap futures.

 

(Xinhua News Agency February 18, 2006)