China brokers shut out of own futures market turn to Singapore

SGX Centre 1 (left) at Shenton Way Road in the Raffles Place District.
SGX Centre 1 (left) at Shenton Way Road in the Raffles Place District. PHOTO: LIM YAOHUI FOR THE STRAITS TIMES

SHANGHAI (BLOOMBERG) - Chinese brokerages ruing the collapse of futures trading in Shanghai are pitching clients similar contracts in Singapore.

"Goodbye, China Financial Futures Exchange; Hello, FTSE A50!" reads an advertisement by a unit of Shenzhen-based Essence Securities Co. on the WeChat messaging service, referring to Singapore-traded futures on an index of the biggest mainland companies.

China's domestic equity futures market, ranked the world's busiest as recently as July, has seen volumes plunge 99 per cent since June as policy makers curbed leverage and position sizes and announced investigations into "malicious" short sellers. That's left brokerages, which boosted staff numbers by 50 per cent since 2011, turning to promoting contracts on the SGX FTSE China A50 Index as an alternative.

"Investors and hedge funds are showing great interest switching to overseas markets," Zhu Bin, deputy general manager of Hangzhou-based Nanhua Futures Co., said. "Foreign investors who have positions in mainland equities will also turn to Singapore to hedge their positions."

Volume in Singapore-listed front-month futures on the FTSE A50 gauge rose to 281,000 contracts on Monday (Sept 14). That was more than 10 times the number of contracts that changed hands on the CSI 300 Index. At end of June, 3.2 million contracts were being traded a day on the mainland Chinese gauge.

Trading in both futures markets soared as China's benchmark stock index rallied more than 150 per cent in the 12 months through the June 12 peak. The Shanghai Composite Index has since tumbled 40 per cent, helping to erase almost US$5 trillion of value on mainland bourses.

Increased interest in FTSE A50 index futures would be a boon to Singapore Exchange Ltd. Southeast Asia's biggest bourse posted a 24 per cent increase in profit in the three months to June 30 as the rally in Chinese stocks spurred demand for derivatives.

While volumes on the FTSE A50 index futures rose to the highest level since Sept 2 on Monday, trading has waned since the peak this year as China's equity boom turned to bust. The 30-day average has fallen to about 301,000 contracts, half the 641,000 high in mid-July.

China Financial Futures Exchange declined to comment when contacted by Bloomberg News. Singapore Exchange wasn't immediately available for comment.

China's authorities are targeting futures because selling the contracts is one of the easiest ways for investors to make large wagers against stocks. It's also a favored product for short-term speculators as the exchange allows participants to buy and sell the same contract in a single day. Yet for hedge funds, futures provide an easy way to adjust exposure to market swings, while large institutions use them to make cost-effective asset-allocation changes.

There are obstacles to trading of overseas stock-index futures. China's capital controls limit foreign currency purchases to US$50,000 a year per individual, while investors need to set up an account at a Hong Kong broker, which can be a unit of a China securities firm, before they can trade overseas contracts.

Speculative traders are being drawn to the FTSE A50 index, while the higher costs from currency transactions and commission fees compared with the CSI 300 deter others, according to Shanghai CIFCO Futures Co. analyst Wang Yiming.

"Once the market recovers, China may gradually ease its restrictions on futures trading," Mr Wang said.