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Opinion

Index futures not for faint-hearted

(Shanghai Daily)
Updated: 2010-04-07 10:58

Restricted trading

The rules are all aimed at maintaining the stability of China's capital markets and reminding investors that the new tool is not as simple as ordinary share trading. Some analysts are worried that index futures may become a new tool for so-called "hot money" speculators.

The restrictions on who may trade index futures may bar many retail investors from participating directly in the new program, but there are indirect ways to benefit.

The index futures will be based on the underlying 300 shares of the CSI 300 index, composed of the biggest blue chips on the Shanghai and Shenzhen stock exchanges. Margin trading and short selling cover the top 50 Shanghai-listed firms by market value and the top 40 Shenzhen-listed firms.

That means the new trading tools will focus attention on the biggest blue chips in China.

"The launch of stock index futures, margin trading and short-selling will usher more capital into low-valuation blue chips," said Liu Zhiyan, an analyst at Fortune Securities Co.

Indeed, after China Financial Futures Exchange announced the launch for index futures, the Shanghai Composite Index rebounded for three straight days, led by blue chips.

Investors can also invest in the shares of big brokerages such as Haitong Securities Co and Citic Securities Co, which are among the six trading houses officially designated to participate in the pilot programs for margin trading and stock short selling. Haitong Securities shares rose 2 percent since the trial program began.

Mom and pop investors need to do their homework before plunging into any aspect of the expanding trading realm.

"Retail investors typically go for short-term speculation in derivatives markets, which enlarges the trading risk, so index futures aren't really suitable for inexperienced investors," said Jin Yanshi, an analyst at Sinolink Securities Co.

"But retail investors can indirectly deal in stock indexes by investing in a fund," Jin added. "They can set a leverage ratio with the fund in advance to control the risks."

For those with larger sums of capital, a private equity fund that manages money flexibly and invests in index futures to seek a higher return may be an ideal investment vehicle.

On a longer term basis, index futures and margin trading are just the starting bells for China's market reforms. Premier Wen Jiabao has called for more efforts to boost direct financing, develop a multi-tier capital market and expand the size of equity and securities financing to meet diversified demands.

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