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China is considering the introduction of Qualified Foreign Institutional Investors (QFII) into its futures market to try to boost the sector.
"We will actively study the idea of introducing QFIIs into commodities futures trading and gradually open the futures market," said Fan Fuchun, vice-chairman of the securities and futures watchdog, the China Securities Regulatory Commission (CSRC).
The government is also mulling over other ways of stimulating the futures market, which many say has been marginalized in recent years.
"China's futures market is facing a historic moment; we will seize this opportunity to push its development through measures such as improving the legal system and being properly prepared for the introduction of financial futures products," said Fan.
He said that as the Chinese economy becomes increasingly integrated with the global one, its need for risk management will grow rapidly. This means the development of a fully-functioning futures market is an urgent task.
Fan was speaking at the China International Derivatives Forum, a two-day conference that ended yesterday in Shenzhen in Guangdong Province.
The futures industry, which began in China in 1993, is currently facing problems. It achieved a trading volume of 10,823 billion yuan (US$1,339 billion) in the first 10 months of this year, down 13 percent from the same period of last year.
"The entry of QFIIs will certainly be a boost to China's futures market, as it will force domestic players to improve their performances," said Chen Xiaodi, a researcher at the China International Futures Co, Ltd, the country's largest futures brokerage.
"But probably they (QFIIs) don't have a big appetite for the market right now, as the choice for them is rather limited and the volume of commodities trading is small," said Chen.
Only nine commodity items are currently traded in China's three futures exchanges, but there is no trading of financial derivatives.
Many experts say introducing financial derivatives products is something that "cannot happen too soon" if the futures market is to get a boost.
"Only after the (financial) derivatives market takes off will QFIIs become really interested," said Chen, the researcher.
Under China's World Trade Organization (WTO) entry agreement, the futures market is the only financial sector that has no set timetable for its opening-up.
But there are signs that China is moving fast in this regard.
ABN Amro Bank NV, one of the world's largest banks, became the first foreign institution to team up with a local futures house, China Galaxy Futures Co Ltd, after it got the go-ahead from the CSRC late last month.
China is also taking other measures to boost the futures market.
The CSRC is pushing for the revision of a rule on futures trading, according to Yang Maijun, director of the CSRC's futures supervision department.
The existing rule, enacted in 1999, Yang said, does not "fit in with the development of the futures market."
But revising the rule would broaden business scope for futures companies, he said without elaborating.
According to the existing rule, futures companies can only conduct brokerage business, seriously hampering their growth.
But market observers expect that under the revised rule, futures companies could conduct futures investment fund management and custodian wealth management businesses.
A protection fund for futures investors is likely to be inaugurated in 2006, according to Yang, a move that he said would strengthen market confidence and spur the development of the futures market by beefing up the protection of investors' rights.
(China Daily December 5, 2005)
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