Napoleon called China “the sleeping dragon” and prophesied that “when it awakens, the whole world will shake”. He could have predicted the enormity of his prediction in 1803. This mighty dragon is rising today, in 2008 China’s rapid economic growth was the focus of media attention. It has seen record-breaking direct investment and has had to trade barbs against the US and Europe for its unending trade deficits.
The stock markets of China, the Shanghai Stock Exchange, and Shenzhen Stock Exchange, have reached new heights in the summer. At the end of the year, China’s financial future (at least according to insiders) will be available for trading on the China Financial Futures Exchange. The Shanghai Shenzhen 300 Index, (CSI300), future is considered the next step in China’s capital market development.
Investors can only make money when the stock market goes up. Investors will now be able to make money when the stock index falls with the introduction of index options. Fund managers will also be able to hedge their portfolios. Leo Melamed (the legendary “father of financial futures” and founder, of the Chicago Mercantile Exchange, (CME), stated in a speech that the Chinese stock market was growing too fast. It is possible that it is too hot. The index futures kickoff does not affect how high share prices will be, as the derivative itself is a hedging tool.
The CFFEX reported last June that the China Securities Regulatory Commission had approved the trading rules for the CSI300. This was a critical step towards the launch of the first index futures market on the mainland. Trading practices, clearing procedures, and member rights and obligations are all covered. They also cover risk control, information management, and the investigation and sanctions for irregular trading.
The CSI300 Index future ticks are equivalent to 300 yuan. The margin level for trading is set at 10% of the contract value. The CSI300’s most recent level of 4400 would mean that one futures contract would be worth 1.32 million yuan. This would make the margin level for each contract 13,000 yuan. The minimum price movement or tick for the CSI300 is 0.2 points. The daily price range limit is 10 percent of the settlement price on the previous trading day.
To take advantage of the imminent arrival of index futures, trading system vendors have already started to develop trading platforms. The CFFEX hosted a February meeting for major financial technology vendors and brokerages to discuss system upgrades and risk management. Chen Jun, the spokesperson for SunGard Kingstar, said that index futures are slightly different than commodity futures. Because of their high turnover volumes, they require greater risk management and concurrent performance.
SunGard Data Systems recently acquired SunGard Kingstar, a Shanghai-based financial system vendor. Chen states that Kingstar was aware of the differences in client demands during simulated index futures trading in early 2005 to prepare for the new regulations. Kingstar created the platform of the V6 future to meet these needs. It has a better risk management function, and greater speed, and can be used for index and commodity futures trading.
There will be more volatility in stock markets and political maneuvering as the giant dragon rises from its sleep. While no one knows how far China’s markets will go, one thing is certain: the addition of another mature financial marketplace can increase global portfolio diversity while reducing risk.
