The Shanghai Stock Exchange is counting down to next month's launch of the mainland's first stock option market. It will be an acid test for the capital markets, says DW columnist Frank Sieren.
It’s not a good idea to burst a blister, because it could get infected. But, as far as the Chinese government is concerned, that principle doesn’t apply to speculative bubbles. Beijing is not prepared to tolerate too much craziness on Shanghai’s booming stock market. The Shanghai Composite Index rose by nearly 63 percent in the last six months, only to plunge in mid-January in the biggest drop in 10 years. The market plummeted almost 8 percent, with many investors punished by new rules tightening supervision.
In order to profit from the stock market boom, private investors in particular took out bank loans in order to speculate. The China Securities Regulatory Commission (CSRC) is therefore introducing stricter controls to ensure that this dangerous game doesn’t spiral out of control. It’s a sensible move that will benefit the China Securities Index, which is still seen as relatively new and untested and has yet to gain full international respect. Even though recent years have seen it come close to rivaling the turnover levels of the Hong Kong Stock Exchange, there is still too much gambling and not enough market analysis going on.
New but high-risk investment opportunities
These days, however, even market participants themselves have recognized that something’s got to give. In the week following that dark day in mid-January, shares rose again gently, but the next obstacle is already looming: next month's launch of the mainland's first stock option market. Guaranteeing purchase or sale of shares according to agreed terms, for example, stock options are seen as a speculative investment tool. In their most simple form, they can be a boon to a fledgling stock market by creating additional liquidity and providing investors with a way of securing their business - although the global financial crisis in 2008 taught us that if finance is too leveraged and nontransparent the result can be meltdown.
But China is a million miles away from creating financial weapons of mass destruction, as the legendary Warren Buffett once dubbed the derivatives that triggered the collapse of Lehman Brothers in 2008. Regulators with the CSRC want to see market participators feel their way into the world of derivatives slowly. Trading of stock options will initially begin with options on the Shanghai 50 exchange traded funds and not for individual companies. To start with, a maximum of 10 percent deviation from the buying rate will be allowed.
Fear of amateurs
Along with this daily cap, Beijing foresees a sort of entrance exam for investors designed to keep amateurs away. Wannabe investors will also be required to have minimum capital of 500,000 renminbi (70,800 euro/$80,000). A childproof stock market, in other words.
When Shanghai’s option market is launched on February 9, the world will be watching. And, despite all the safety precautions in place, nerves are frayed: Rather than banging the drum ahead of the launch, Shanghai Stock Exchange CEO Huang Hongyuan recently stressed in an interview with state media that focus should be placed on risk controls for options trading, warning against "frantic trading" and overzealous use of this new instrument.
One hopes investors will heed his advice. And, who knows, perhaps the Chinese will develop a new form of options trading to rival those of the US and Europe, one that stands for more common sense and less greed.
DW columnist Frank Sieren has lived in Beijing for 20 years.