China will introduce stock index futures "soon" to give investors tools to hedge market risks, Zhou Qinye, executive vice president of the Shanghai Stock Exchange, said yesterday.

 

China wants to use stock index futures to allow investors to short sell on a domestic stock market that has more than doubled this year.

 

The benchmark Shanghai Composite Index has gained 168 percent this year after soaring 130 percent last year.

 

Short selling the CSI 300 Index, which includes the heavyweights of the Shanghai and Shenzhen markets, will allow traders to profit on an index decline by selling contracts of the index they do not own and buying them at a lower price.

 

Zhou did not say exactly when the index futures would be launched.

 

Zhou said he would like to introduce other short-selling mechanisms like margin trading and securities lending - these are issues he is enthusiastic about but says that now is not the right time for them.

 

China established its only financial futures exchange last September but the introduction of index futures remains in the pipeline. The delay is caused partly by concerns that this could destabilize the stock market in which millions of small investors have placed their life savings.

 

Shang Fulin, the head of China's securities watchdog, said last week that preparations for the new products were almost complete.

 

Liao Qun, the chief economist and strategist of China Banking at CITIC Ka Wah Bank, said it now was a good time to launch the index futures after the yuan-backed A share market experienced corrections rather than on an uncapped rising trend.

 

The stock market may fluctuate at the end of this year but a bubble is not likely if the listed banks' profit growth is sustainable.

 

The combined profit of China's 1,519 listed companies surged 67 percent to 565.6 billion yuan (US$75.4 billion) through the third quarter, supported by rosy investment returns and business growth.

 

"The third quarter profit growth will act as a catalyst for the rise of the index but a surge is not likely by the end of this year," Liao said.

 

Meanwhile, he said it remains undeniable that the current A-share price-to-earnings ratio is higher than desirable.

 

"If valuations surge further, they may quickly go beyond the limits that investors might accept as reasonable and this may trigger heavy adjustments," he said.

 

(Shanghai Daily November 2, 2007)