Educate investors

Nicole Yuen, head of China equities at UBS, said a volatile market and declining investor confidence form a poor backdrop for the introduction of index futures, short selling and margin trading.

"Under the current depressed market sentiment, it's not wise to go ahead with these reforms," said Yuen. "But preparation for these innovations should not be stopped."

Margin trading is the practice of borrowing money from a broker to purchase stock. It allows an investor to control more shares than he would normally be able to finance. Short selling permits people who believe share prices will drop to sell borrowed securities and buy them back at a lower price to repay the lender. Both mechanisms carry high risks and can be ruinous to unwary investors.

The risk and the need to educate investors how the systems work has caused at least two postponements in the last three years.

Industry analysts predict only select brokers will be allowed to participate if the systems are introduced on a trial basis later this year.

China set up its financial futures exchange in September 2006 in preparation for the debut of index futures contracts, which will be based on the CSI 300 index that tracks the top 300 Chinese mainland-listed firms.

Index futures, often used as hedging tools, allow an investor to make bets on the direction of an entire index rather than individual stocks. Like margin trading and short selling, they are speculative trading mechanisms and require sophistication on the part of investors.

"The global financial-market meltdown will make regulators take an even more cautious attitude in the introduction of index futures," said Xu at Bohai Securities. "Unless the stock market shows signs of overheating, it's not likely the futures products will be unveiled this year."

Analysts interviewed by Shanghai Daily said they doubt the securities regulator will set up a government-led buffer fund to stabilize the stock market this year or introduce more measures to curb a glut in stock supply caused by the expiry of lock-up periods. Neither was mentioned in the summary of the meeting last month, they said.

The stock market's tumble last year was partly blamed on the volume of shares hitting the market after lock-up periods on offerings of state-owned shares expired, making non-tradable stocks tradable.

China's stock regulator has already asked big stakeholders who hope to dispose of more than 1 percent of a listed firm's total shares to sell them in off-market block trading. But some market analysts are urging more government action to counter the possible negative effects of non-tradable shares hitting the market.

"The regulator is expected to improve the block trading system instead of unveiling new measures to prevent an equity glut," said Jiang Jianrong, an analyst with Shenyin and Wanguo Securities Co. "It's almost impossible for the government to launch a stabilization fund."

UBS's Yuen suggested Chinese market authorities should look to Hong Kong for workable solutions.

In 1998, Hong Kong acquired a substantial portfolio of shares to stave off collapse during the Asian financial crisis. A year later, as the first step in a program to dispose of the shares, it launched the initial public offering of the Tracker Fund, which allowed the government to extract value from the shares without dumping them on the market.

Among other plans unveiled last month, the stock regulator said it hopes to boost the value of mainland-listed stocks by encouraging public companies to increase dividend payments and buy back more equity.

But what's more important for the regulator, analysts said, is to weed out corruption and illegal trading to bolster investor confidence.

"One of the regulator's priorities is to ensure all market participants operate in line with rules and regulations," said Shenyin and Wanguo's Jiang. "Compliance seems important against the backdrop of the ongoing financial crisis and tough economic times."

(Shanghai Daily February 12, 2009)