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These reforms had been approved already in 2008 but they were delayed due to the global financial crisis, according to the CSRC. The Chinese government believes that these reforms are an important step in the development of their capital markets and will inject new vitality into the securities market.

The Economic Times (ET) reported on 8-Jan that Index futures will be traded on the China Financial Futures Exchange in Shanghai. These index-futures need 3 months to start up while the trial period for margin trading and short selling will begin sooner.

Huang Yan, fund manager at Guotai Fund Management Co in Shanghai told the ET: "This is positive news for the market, and it will likely change people's investment strategies."

The ET further reported that this announcement was a shot in the arm for investors who badly needed a hedging tool post-recession. In the absence of such hedging tools in the past, investors did not have many options to cut their losses in the event of a falling market other than to sell-off their shares, thereby causing the market's decline further.

The New York Times said recently that the introduction of short-selling in China would not match with the recent regulations adopted in other parts of the world. In response to the global crisis, U.S., British, French, Italian and German regulators in recent weeks banned short-selling of financial stocks temporarily, while Australia, Singapore and Taiwan restricted the practice.

Jiang Yingkun, an analyst at Guotai Jun'an Securities Co., told the Shanghai Daily: "The government approved the two products at the same time to balance the market, as index futures is always seen as a negative signal for the market while margin trading is to boost the market."

In 2006, China established its only financial futures exchange for the debut of index futures, which will be based on the CSI 300 index that tracks the top 300 mainland-listed firms. However, there have been some concerns with the index futures because it has the potential to destabilize the stock market.

The NYT said China, since 2006, had been considering starting margin trading - in which investors can borrow money from brokerage businesses to buy shares - and short-selling - in which they borrow stocks from brokers and sell them, hoping to buy them back at lower prices. The CSRC expected margin buying would greatly exceed short-selling in the initial stage because brokerage businesses had only a limited amount of stocks available to lend.

Some other market watchers welcomed this news. Jeff Papp, a senior analyst at Lisle, Illinois-based Oberweis Asset Management Inc. told Business Week: “A potential long-term development is more clarity in the market now that there’s more liquidity in the market for the true valuations of the companies that are dual listed.”

While, Eric Conrads, a hedge fund manager at Armada Capital SA, a Mexico City-based partnership with ING Investment Management, which invests in China through U.S.-listed shares and exchange-traded funds, said “China is going to the direction of freedom for its markets and more flexibility for its investors so it’s good news.” Written by SC -

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