Martin Currie Ltd. and AMP Capital Investors said stock-index futures will let them hedge in China and more effectively compete with local fund managers as the nation prepares to open the market to foreign institutions.
China will allow qualified foreign institutional investors, or QFIIs, to invest in stock-index futures, the U.S. Treasury Department said yesterday at the end of the U.S.-China Strategic & Economic Dialogue in Beijing. There was no starting date in the statement.
“I say it’s extremely likely we will make use of index futures over time,” Chris Ruffle, who helps manage $19 billion as China co-chairman of Martin Currie in Shanghai, said in a phone interview. “We should be on even terms with domestic institutions.”
The move will widen investment options for overseas institutions in the world’s third-biggest stock market by value. China restricts foreign investors to dollar-denominated B shares traded in Shanghai and Shenzhen, while only institutions approved under the QFII program can invest in yuan-denominated A shares. The total combined quota for QFII funds is $30 billion, a fraction of the stock market’s capitalization of $2.7 trillion.
Futures, or agreements to buy or sell the CSI 300 Index at a preset value, began trading on the China Financial Futures Exchange in Shanghai on April 16, while margin trading and short selling was introduced March 31.
The approval “will help manage our exposure to China’s A shares going forward in that it provides more flexibility and a hedging tool,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital, in an e-mail response.
Stock Market Slump
The CSI 300, which tracks 300 of the largest companies on China’s two equities exchanges, has dropped 21 percent this year on concern government measures to cool economic growth will hurt earnings. The Shanghai Composite Index has slumped 20 percent this year after surging 80 percent in 2009.
Leo Melamed, a director of CME Group Inc. who advised Chinese regulators on the creation of the futures market, said in January it might take two to three years for foreign investors to trade stock-index futures in the nation.
China International Capital Corp. said it would take time before foreign investors are allowed to trade stock-index futures given the amount of money that they have and the limited size of the futures market.
“The dialogue is of strategic long term in nature; so the agreement may not be carried out immediately,” global equity strategist strategist Hao Hong said in a report today. “The futures market is about the same as the cash market. So if it is immediately opened to international investors to participate it could be a little tricky.”
Index futures have added volatility to the spot market, according to Mark Mobius, who oversees about $34 billion in emerging-market assets as executive chairman of Templeton Asset Management Ltd. He said in a May 13 interview that’s why he wasn’t “surprised” by the slump in China stocks.
Manop Sangiambut, head of China A-share research at CLSA Asia-Pacific Markets, also said last week that the introduction of index-futures trading contributed to recent declines as “some investors see it as an alternative investment rather than a hedging tool.”
Opening up the futures markets to foreign investors “may reduce volatility by allowing more participants to place strategic bets,” said Peter Alexander, Shanghai-based principal at Z-Ben Advisors, which provides research to fund management companies, said in a phone interview. “This is fantastic news.”
To contact Bloomberg News staff for this story: Allen Wan at +86-21-6104-7041 or firstname.lastname@example.org