Markets

First month of futures trading ends smoothly

By Li Xiang (China Daily)
Updated: 2010-05-22 09:06

BEIJING - China's stock index futures wrapped up their first month of trading on Friday as the May contract was delivered smoothly without triggering sharp declines or volatility in the spot market.

The May contract rose 0.51 percent to close at 2749.8 points while the June contract, the most actively traded, rose 1.44 percent to close at 2801 points. The CSI 300 Index, which tracks 300 large caps traded on the Shanghai and Shenzhen bourses gained 1.57 percent to 2768.79 points.

The smooth settlement of the May contract eased investors' worries about the "expiration day effect", with fears that it would trigger sharper volatility on the spot market due to more active trading of index futures as investors rushed to close positions for May and changed to June contracts on that day.

"The trading volume and the holdings of the May contract dramatically decreased in the past month, which significantly reduced the incentive of price manipulation in the spot market," said Yang Cui, an analyst at Changjiang Securities.

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Chen Zhenzhi, an analyst at Guangfa Futures, said the impact of the expiry day was very limited due to the fact that most institutional investors have not participated in index futures trading.

The China's index futures market is still dominated by retail investors although securities firms and equity funds have been allowed to trade the new financial instrument. The securities regulator required that institutional investors should trade index futures for hedging rather than speculative purposes.

Trading of index futures contracts, agreements to buy or sell the CSI 300 Index at a present value on an agreed date, allow investors to profit from both gains and declines in the market. Chinese investors could previously only profit from gains in equity prices.

Some analysts said the launch of the financial instrument was one of the reasons leading to the recent decline as the short selling mechanism increases market volatility in the short term.

The benchmark Shanghai Composite Index has declined 17 percent since the launch of index futures trading on April 16. It has been ranked as one of the world's worst performers along with some debt-troubled European countries.

But Wang Lianzhou, former deputy director of the National People's Congress' finance and economics committee, was recently quoted by Chinese media as saying that the market's decline should not be blamed on index futures, which is designed to make the market more professional and less speculative.

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