China plans to accelerate development of its futures and derivatives markets to help companies cope with currency and stock fluctuations in a more market-driven financial system, officials said.
The government is considering introducing interest-rate and stock-index futures, Cheng Siwei (程思危), vice chairman of the National People's Congress, and Shang Fulin (
China is making its currency more flexible, deregulating interest rates and increasing the supply of tradable shares on stock markets, increasing the need of companies and investors for tools to hedge risks.
The government hopes that a more developed domestic derivatives market will help avoid a repeat of scandals such as China Aviation Oil (Singapore) Corp, which lost US$550 million trading options in Singapore last year.
China Aviation "is a wake-up call," Cheng said at today's conference. "It's a sign that we lack the ability to hedge risk. It's necessary for China to develop financial derivatives so that we can be competitive."
A derivative is a financial obligation whose value is derived from interest rates, the outcome of specific events, or the price of underlying assets such as debt, equities and commodities.
China hasn't allowed trading in financial futures since the mid-1990s, when the government halted trading after speculation and insider trading caused the market to crash. Authorities shut all but three exchanges and scrapped more than 50 contracts.
The introduction of currency futures in China will take "a long time" and may not happen until the yuan becomes fully convertible, Cheng said.
China on July 21 ended the yuan's decade-old peg to the US dollar and started managing it against a basket of currencies.
The yuan is allowed to move 0.3 percent either side of a daily fixing rate set by the central bank. The People's Bank of China on Sept. 23 widened the daily trading band for the euro, yen and Hong Kong dollar to 3 percent, from 1.5 percent. The government hasn't given a timetable for free-floating the currency.
The start of a program this year to convert non-tradable, mostly state-owned, stockholdings into common shares that can be bought and sold on exchanges has paved the way for developments such as stock-index futures, China Securities Regulatory Commission Chairman Shang told the conference.
Non-tradable shares make up almost two-thirds of the value of listed companies. The country is seeking to unwind five decades of state ownership and bring its exchanges in line with global standards as it opens them wider to overseas investors.
The Chicago Mercantile Exchange plans to develop China-based futures products in partnership with domestic exchanges such as the Shanghai Stock Exchange and Shanghai Futures Exchange, Chief Executive Craig Donohue said in an interview.
The Merc is trying to position itself to lead China's evolving derivatives market, and is also working with Chinese regulators and banks to encourage use of the US$600 trillion US-listed derivatives market.
"Chinese banks and financial institutions are currently using our products such as euro-dollar products, our stock index futures contracts and ultimately, we hope, the foreign-exchange contracts," Donohue said.