Foreign investors eye China´s futures market as policy control eases

Source: Xinhuanet | 02-26-2007 11:00

As the Chinese government is considering easing control over foreign investment in the futures sector, foreign investors are reportedly rushing into talks with potential Chinese partners on possible mergers and acquisition.

The Hong Kong-based securities brokerage CLSA is said to be in negotiation with Xiangcai Qinian Futures, founded in 2004 with a registered capital of 30 million yuan (3.9 million U.S. dollars), to inject 20 million yuan for the company's stakes, according to Saturday's China Business Newspaper.

Without revealing the specific list of shareholding, the newspaper said that Xiangcai Securities, the holding company of Xiangcai Qinian Futures, was forced to sell the assets due to its financial crisis, but hoped to maintain its share-controlling status.

If CLSA succeeded in its bid, Xiangcai Qinian would meet the minimum capital requirement of 50 million yuan of registered capital for a clearing member of China Financial Futures Exchange (CFFE).

CFFE, the first financial derivative exchange in China, was established in September last year for the country's futures trading. Analysts contended that the stock index future as China's first financial derivative product was probably around the corner.

Chinese futures companies ranked among the last 50 are all potential candidates for M&A from foreign institutions, says Liu Xu, a macroeconomic policy analyst with Capital Futures Co., Ltd, as foreign investors tend to purchase a physical entity at a relatively low cost to engage in the futures business in China.

Goldman Sachs Gaohua Securities Co., Ltd is reportedly to be seeking potential partners among Chinese futures companies as well, so that its clients can invest in stock index futures in the future.

Morgan Stanley, which once held a major stake in China International Capital Corporation (CICC), was also encouraging CICC to buy into futures companies.

According to sources with the Ministry of Commerce, some foreign investment has actually penetrated into the futures sector by holding stocks in Chinese futures companies, although the country bars foreign capital from the futures sector.

The industrial guiding catalog for foreign investment, currently being revised by the Ministry of Commerce, is likely to open the futures markets on certain conditions in certain areas, the China Business Newspaper report said.

A draft revision of regulations on futures trading recently approved by the country's State Council suggests that foreign investors may be allowed to acquire Chinese futures companies.

Originally, Hong Kong investment was allowed to have no more than 49 percent of a mainland futures company under CEPA (Closer economic Partnership Arrangement) between the Chinese mainland and Hong Kong and Macau to encourage free trade.

Foreign investors could only make a detour to merge and acquire mainland futures companies via its Hong Kong branch, as in the trial case of Galaxy Futures jointly established by the Hong Kong branch of ABN AMRO Bank and China Galaxy Securities Co.

Hong Kong investment still holds priority over foreign investment concerning the M&A of mainland futures companies, but appears unattractive to those companies.

Hong Kong investment is not the best choice for mainland futures companies due to its lack of advanced management, which is exactly what the latter need from their new shareholders to upgrade their brands, says Liu Songtao, general manager of the Beijing branch of Shanghai Continent Futures Co., Ltd.

The newspaper also said that a report from the research center of China Securities Regulatory Commission had advised the government to introduce QFII into the futures sector.

However, foreign investors' entry into China's futures market by buying into Chinese futures companies remains uncertain till further policies comes up, the report said.

Editor:Du Xiaodan