China is to issue guidelines to gauge whether a mainland futures firm is qualified to do business in Hong Kong, giving local futures firms their first opportunity to expand overseas.

The rules, which will probably be issued after Spring Festival by the China Securities Regulatory Commission (CSRC), detail the qualifications a futures firm needs if it wants to establish branches in Hong Kong.

According to the Shanghai Securities News, to do business overseas, a futures firm should not have illegally operated in recent years, and its annual average futures deposits should be within the top 30 in the industry.

The firms will also be required to have made a profit for three of the past five years, and their registered capital should not be lower that 50 million yuan (US$6.17 million), with net assets above 40 million yuan (US$4.94 million).

Good corporate governance standards and risk management practices are also requirements.

Jinrui Futures Co Ltd, China's largest futures firm dealing with copper, has been preparing to expand into Hong Kong.

Backed by its main shareholder, Jiangxi Copper Corporation, the country's largest copper producer, the firm has full confidence in its ability to develop overseas and is now seeking a partner for a joint venture in Hong Kong.

"Our partner must be experienced in futures exchanges," Jiang Changwu, general manager of the firm, told China Daily.

"We prefer it to be an American or European company, so they will bring advanced futures management practices," Jiang said. He believed the joint venture would be of mutual benefit because foreign companies will come to China one day.

"We are learning about Hong Kong's laws, regulations, and company operating practices. Only after we are familiar with these can we do business there," Jiang said. The company has already picked a site for its new office in Hong Kong.

According to Jiang, the firm has tried to recruit talent familiar with finance and futures exchanges over the past two years. All senior staff at the firm have been sent to Hong Kong for training.

"But we will employ some local staff," Jiang said. "They are more familiar with Hong Kong's futures practices."

Currently, clients of mainland futures firms are limited to domestic companies. Their Hong Kong offices will probably act as agents for domestic companies that want to carry out futures trading overseas.

"China's current exchanging rate policy also affects domestic firms in their desire to expand overseas," Jiang said.

According to the Shanghai Securities News, other firms, including China International Futures Co Ltd (CIFCO), Yong'an Futures Co Ltd and Star Futures Co Ltd, intend to open offices in Hong Kong.

Ma Wensheng, president of CIFCO, was on a business trip to Hong Kong yesterday. He refused to comment on the coming developments.

The CSRC also issued another rule yesterday saying an investor must open a special bank account to trade to prevent futures firms from embezzling investors' money.

Investors will be allowed to open futures transaction accounts in major domestic banks, including the Industrial and Commercial Bank of China, Bank of China, the Agricultural Bank of China, China Construction Bank, and Bank of Communications.

(China Daily January 27, 2006)