Innovation leads to progress and that is what the recent market changes in China promise. China launched its first stock index futures on Friday,a milestone in the development of the country's relatively young financial markets,with initial signs of a warm welcome from investors hungry for new trading tools. At an opening ceremony at the China Financial Futures Exchange (CFFE) in Shanghai's financial district,officials addressed investors and guests from overseas exchanges,with red banners on the walls proclaiming the occasion. When the electronic board at the front of the room showed all four contracts rising after the opening gong,the crowd grew loud with excitement. The last thing regulators wanted to see was too much volatility,said a manager at a futures brokerage. Since prices did not fluctuate too much and the market appeared to be going in the desired direction,people were relieved. The nearest contract,to be delivered on May 21,opened at 3,443 points,up 1.3 percent from the base value of 3,399 points set for all the contracts. It fell back slightly in mid-afternoon trade to 3,437 points,up 1.1 percent. The rise in the futures contrasted with a fall in the spot share market,however. The benchmark Shanghai Composite Index closed provisionally 1.1 percent lower,led by property shares after the government announced fresh measures to cool the sector,including increasing mortgage rates and down payment requirements. The spot CSI300 index,on which the futures are based,fell 1.1 percent. Some analysts expect that index to quickly replace the Shanghai Composite as the benchmark now that the futures have been launched. Plenty is riding on the success of the futures market as China looks to expand and deepen its financial markets and attract more sophisticated investors. For one,the futures are expected to give investors a vital tool for hedging,helping to ease the big swings that have characterised Chinese markets in the past and making it possible to carry out a broader range of investment strategies. If things go smoothly,it could herald the start of a fresh round of innovation,leading to more products that will help the country's markets develop towards becoming a global financial centre,as the government aims to engineer by 2020. While the futures are currently not available to foreign investors,many are hopeful that Qualified Foreign Institutional Investors (QFII),who may participate in the capital markets through a quota system,will be allowed in sometime soon. Exchange officials have also said in private that if the index futures proved to be a success,the next product - options on the futures - could be launched within a year. Equally important to the positive pricing on the debut,the volume of futures trading surprised on the upside,exceeding what many analysts had expected by a significant margin. The first day of trading indicates liquidity is very good and pricing is reasonable,paving the way for future developments of China's financial derivative markets,said Liu Zhongyuan,chief economist at Xiangcai Qinian Futures in Shanghai. Such a debut gives us confidence that the turnover of the index futures could reach roughly the same level as for China's commodity futures,Liu said. Combined turnover of China's three commodity futures exchanges in Shanghai,Zhengzhou and Dalian was 130 trillion yuan ($19 trillion) in 2009,the world's biggest commodity futures market,with average daily turnover of around 500 billion yuan. The longer-term index futures contract suggested investors remain confident about the prospects for growth and corporate earnings in the world's third-largest economy,despite near-term worries about overheating and potential policy tightening. In the cash market,immediate concerns about tougher mortgage requirements announced on Thursday weighed on property shares. Developer and construction firm China State Construction Engineering Co and China Vanke fell.
