The hundred or so people gathered in a Shanghai park one Sunday morning was not your usual crowd. They were potential investors eager to delve into the complicated and risky world of financial futures.
The China Securities Regulatory Commission (CSRC) said in December that financial futures would be launched in the first half of 2007. This is good news for a market that has risen more than 50% this year – investors will be able to go short and insure themselves against a downturn.
"Financial futures are an excellent form of risk management, so nearly all of the investors we've come across have shown a strong interest. They are like hungry sharks waiting to seize the next opportunity," said Lin You Yu, an information manager at Shanghai Jiuheng Futures Brokerage.
Shanghai Jiuheng is one of dozens of brokerages that have been educating the public for the past six months. The company works with exchanges and institutional and retail investors to facilitate futures trading and investing.
From the regulator's point of view, a little education could go a long way. China first tried financial futures in 1990 but years of poor regulation and insider dealing, that culminated in a Treasury bond futures meltdown in 1995. Beijing shut the door.
From 1,000 brokerages operating across 50 exchanges, the authorities plucked out 180 and allowed them to trade in 12 commodities at exchanges in Shanghai, Dalian and Zhengzhou.
Futures contracts in items such as copper, aluminum, cotton, corn, sugar, wheat and soybeans have proved popular, with total trades last year hitting a record US$2.69 trillion. In 2007, some 200 million contracts have been awarded, up from 27 million in 2000.
It is because of this strong performance that traders expect financial futures to do well.
Warrants contracts and currency swaps are already in limited supply in China. Stock index futures, foreign exchange futures, options and, eventually, equity futures are likely to be added to the list of financial derivatives. The first product is expected to be a contract based on the Shanghai Shenzhen 300 Index, with an initial group of 10 brokerages receiving licenses to trade it.
The major customers will likely be securities dealers, fund managers and commercial banks, but individuals will be able to invest through private fund offerings and maybe even buy options online on leveraged positions.
"My fellow investors are also excited about the introduction of financial futures," said Xu Hua, a private investor who has been active in commodity futures. "We're looking to diversify our portfolio in addition to stock investments, now that the real estate market is not so profitable."
For institutional investors that do offshore business, financial futures will offer an easy hedge against exchange and interest rate risk, said Glenn Maguire, chief economist in Hong Kong for Société Générale.
"This will help effectively manage forward risk and deepen the market as businesses will be able hedge against the appreciation of the renminbi."
Preparing the ground
Preparation started in October 2006, when simulations began at the Shanghai-based China Financial Futures Exchange, the country's first financial derivatives exchange.
Tests have been carried out on how shifts in the Shanghai Shenzhen 300 Index would effect futures. There are measures to control volatility, including a minimum margin of 8% on contract values and maximum daily movement of 10% in trades.
Firms applying to conduct trading settlement services must have registered capital of at least US$6.5 million and the CSRC will also require the Chinese futures market to set up a guarantee fund and interest compensation mechanism.
Some critics say the return of financial futures may spur speculation in a red-hot market, but Stephen Green, Standard Chartered's chief China economist, sees it as positive.
"We will expect a lot of short-term volatility, but in the long-term, the introduction of financial futures is a great thing for diversifying the China market," he said.