Shanghai paves way for short selling
By Patti Waldmeir in Shanghai and Robert Cookson in Hong Kong
Published: January 8 2010 19:38 | Last updated: January 8 2010 19:38
Beijing has approved the launch, on a trial basis, of stock index futures and the short selling of stocks, an important and long-awaited step in the development of China’s equity market.
Shorting stocks and trading index futures will allow traders to profit from falling as well as rising markets. They will also enable investors to hedge their positions against downturns in China’s notoriously volatile markets.
Peng Yunliang of Shanghai Securities said the announcement was “a milestone in China’s financial history”, although it could take some time to be fully implemented.
The China Securities Regulatory Commission said on Friday that the State Council, China’s cabinet, had approved the measures, although it might take three months to complete preparations for the launch of index futures.
The government also approved margin trading, under which investors borrow money from brokerages to buy shares.
In short sales, investors sell stock they do not own, betting that they will be able to buy it back at a lower price and profit from the difference.
The regulator said it would follow the principle of “test first, then expand”, and would select some companies to launch products on a trial basis.
But the statement left many questions unanswered, including which companies will participate, whether foreign groups will be included, and the exact timetable.
Chinese investors have been awaiting the introduction of stock index futures for more than three years, since the establishment in 2006 of the China Financial Futures Exchange in Shanghai. The exchange has been conducting mock trading since then and the regulator has been preparing guidelines for index futures and educating investors about risks.
It was not clear whether the futures launch would take place within the three-month period mentioned by the regulator, or be further delayed. The introduction of trial short selling and margin trading is expected to come first, but the timetable is uncertain. More than a year ago, the regulator announced that short selling and margin trading would be introduced on a trial basis, but that never happened.
“Like anything in China, it’s going to be limited,” said Fraser Howie, author of Privatizing China: Inside China’s Stock Markets.
He said the government would roll out the rules slowly and selectively, and could suspend them at times to influence the stock market.
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China Opens Door for Stock Futures Launch
By MICHELLE NG And JAMES T. AREDDY
SHANGHAI -- China's State Council approved in principle the launch of stock index futures and a trial program for short selling and margin trading of stocks, all part of efforts to develop the country's capital markets.
No date was set for the much-awaited launch of the index futures. In a statement confirming the Cabinet's approval, the China Securities Regulatory Commission said it is expected to take around three months for launch preparations to be completed.
Beijing has for years balked at introducing potentially risky financial derivative and investment tools. The worry: They allow investors to bet against the stock market.
For regulators, endorsement of stock index futures by the State Council, China's highest administrative body, provides important political cover. China banned financial futures in the mid-1990s after a massive scandal involving a similar product, futures on bonds, that nearly collapsed the nation's nascent financial system. Financial problems involving derivatives in overseas markets, from Singapore to Japan, plus losses in derivatives markets by Chinese companies, left policy makers with no appetite to green-light financial futures for the stock market.
Futures do exist in China. A decade or so ago, as Beijing began to consume commodities like cotton, soybeans and copper on a big scale policy makers retooled a system of futures products based on the prices of those products. Today, China's commodity futures exchanges are among the most active in the world and, while foreigners don't have easy access, increasingly influence global prices of those products.
The securities regulator also didn't reveal when the trial for short selling and margin trading will begin, but said the program will be gradually extended. It added it will select "good quality" brokerages to participate in the program.
Senior regulatory officials have periodically fanned hopes for the index futures' imminent launch in the past few years by saying conditions are ripe enough.
While some analysts said the State Council's endorsement could lift Shanghai shares Monday, others said with details still sketchy such optimism may be premature.
"The CSRC statement says the preparation will take about three months but anything can happen in the interim that can prompt Beijing to take a U-turn," said Qian Qimin, an analyst at Shenyin & Wanguo Securities.
—Terence Poon and Juan Chen contributed to this article.Write to Michelle Ng at michelle.ng@dowjones.com and James T. Areddy at james.areddy@wsj.com
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