China Plans Biggest Futures Market Overhaul Since 2015 Clampdown
China Plans Biggest Futures Market Overhaul Since 2015 Clampdown
(Bloomberg) -- China is mulling the biggest changes to its futures market since 2015, an overhaul that would give global investors unprecedented access, make it easier to execute bearish trades, and lay the groundwork for wagers on stock-market volatility.
The proposed changes, still under discussion by regulators, would remove a ban on unhedged bets against the market and allow foreigners to trade equity-index and commodity futures without a government-approved quota, according to people familiar with the matter. The China Financial Futures Exchange is also considering a new range of products, including futures on the MSCI China A Index, the people said. The bourse plans to introduce an equity volatility index that may eventually serve as the basis for derivatives contracts.
The proposals suggest China is pushing ahead with efforts open its financial system, despite an intensifying trade war with America. Looser restrictions on index futures would not only breathe life into a market that regulators effectively killed during a haphazard crackdown in 2015, they would help attract overseas inflows at a time when China needs all the foreign capital it can get. Even after the country’s domestic shares won entry into MSCI Inc.’s global indexes, some international investors have been reluctant to increase their exposure because of a dearth of hedging tools.
There’s no clear timetable for the new rules to be introduced, but preparations by regulators and exchanges have gathered pace in recent months, said the people, who asked not to be named because the discussions are private. While contracts linked to crude oil, iron ore and purified terephthalic acid are already fully open to foreigners, the changes would expand access to the entire commodity futures market, they said.
The China Financial Futures Exchange declined to comment. The China Securities Regulatory Commission didn’t immediately reply to a fax seeking comment.
Futures-related stocks surged. China CIFCO Investment Co. rose as much as 7.7% while Jiangsu Holly Corp. gained 4.4% in Shanghai.
International equity investors currently hedge their China exposure with overseas futures contracts, Hong Kong-listed stocks, exchange-traded funds or structured products, all of which have features that make them less than perfect. Singapore Exchange Ltd. offers the most popular offshore futures tied to Chinese-listed shares, while Hong Kong Exchanges & Clearing Ltd. signed an agreement with MSCI in March to introduce similar contracts, though they haven’t yet launched.
In the past year, China has stepped up efforts to make it easier for international investors to access its capital markets. In January authorities said they would expand the scope of the government quota, called the Qualified Foreign Institutional Investors program, by allowing offshore funds to trade a wider range of futures and options, though the plan has yet to take effect.
Restrictions on index futures trading introduced during the country’s 2015 stock-market crash -- such as the number of contracts that each investor can open -- have been eased multiple times in recent years. The foreign opening plans under consideration would go further than the pre-2015 rules in giving access to overseas participants.
Read more: China Opens Door for Quants Slammed Shut in 2015
Foreign institutions and individuals held about 3% of domestic Chinese stocks and 2% of bonds at the end of March, according to the People’s Bank of China. Central bank Governor Yi Gang said in March that more hedging tools were going to be part of the country’s financial opening. Authorities are approving majority foreign control for onshore financial services ventures, and have said they will scrap foreign ownership limits of securities firms, fund firms, life insurers and futures firms in 2020.
--With assistance from Amy Li, Evelyn Yu and Lucille Liu.
To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net;Heng Xie in Beijing at hxie34@bloomberg.net;Xize Kang in Beijing at xkang7@bloomberg.net
To contact the editors responsible for this story: Sam Mamudi at smamudi@bloomberg.net, Michael Patterson
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With assistance from Bloomberg