In its fervent bid to realize its dream to be a world-class financial center, Shanghai has established a market for almost everything. But the various elements that are essential to the development of those markets are mostly absent. As a result, the markets are prevented from fulfilling their designed functions.
The 3-year-old index futures market is a case in point.
The market, opened in April 2010, is still limping along without making much of an impact on the stock market. The volume of trading in index futures is tiny compared to the size of the stock market. As such, it is seen to have little value for hedging by institutional investors.
In a move apparently to inject new life into the market, the authorities earlier said they would open the market to QFII investors, including some of the largest global financial institutions. But it remains doubtful if these big fish are willing to play in a market that is too illiquid to do much meaningful hedging.
As we all know, trading in financial futures is a zero-sum game. Hedgers alone don't make a market. There has to be enough counter trade from risk takers, or speculators, who take an opposite view to that of the investors who feel the need to hedge their holdings against a possible downturn.
But in Shanghai's financial circles, speculation is a dirty word. It conjures up images of shady people with lots of money plotting in basement offices to profiteer by cornering the supply of anything from property, coal, white wine, pork or garlic.
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