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US expert calls China's index futures launch historic

(Xinhua)
Updated: 2010-04-09 09:05

CHICAGO - The upcoming launch of China's index futures is a historic move that represents a giant step by China towards a market-driven economy, said the founder of financial futures.

"I think the Chinese officials have done extremely well in preparing for the market," Leo Melamed, the globally recognized founder of financial futures, told Xinhua.

After a long period of preparation, China's index futures market will open in mid-April.

Melamed, currently chairman emeritus of CME Group and CEO of global consulting enterprise Melamed & Associates, Inc, said: "Without financial futures, such as an index futures market, China would still be behind the rest of the world in financial capability. This gives them the major step in that direction for the development of capital markets in China."

When asked if the futures market will increase price volatility in the market, Melamed said: "The answer is that, in fact, over the course of the years, all studies have indicated just the opposite. In the long run, the futures market helps stabilize the price movement of stocks and other commodities."

"Without a futures market, an investor has only one place to go," he said. "He either buys or sells. He has no second tool. When you have only those two tools, then the market goes in one direction all the time, up or down. When you increase the ability of another financial tool, then the investor has choices. He can buy on the stock market, maybe hedge by selling at the future market. Or he can sell on the stock market and hedge at the futures market."

"As a result of that, over the course of time, not every week, it stabilizes both markets, because it gives the investor choices of tools to use in finance. It is very important."

Melamed also dismissed the risks of using futures as a tool for hedge funds to manipulate the market.

"I must say that the manipulation is not necessarily the same thing as profit," he said. "I don't believe hedge funds manipulate. They take advantage of the situations that are created in the market place."

China is still a developing country and its financial market is not very well developed. When asked his suggestions for the Chinese government to manage the futures market, Melamed said: "There are risks in the new market if you don't understand and if you process without caution and without careful education."

"There is no question that it will take a long time for the index futures market to mature. It will take many years for that to happen. The Chinese government officials have done everything they can to prepare for the launch that they are doing...I think the Chinese officials have done extremely well in preparing for the market," he said.

Quoting the Confucian saying that a long journey starts with the first step, Melamed said: "It will take time to learn and develop the fundamentals and understand how to use this market."

Melamed also had advice for small investors in China. "Small investors should watch, listen, read and learn before they quickly go into the futures market. It is a new instrument and it takes time to learn it. There are risks. My suggestion is not to jump in, but to prepare and educate. There are many books to read and many people to talk to who understand the market. And little by little when they begin, they should begin small, baby steps, not large risks," he said.

Comparing the new market with the 1995 launch of China's bond futures market, the financial expert said: "Today's market for the launch of financial index futures is completely different from the kind of market in 1995. Today, the government has learned an enormous amount about futures markets. We at CME group helped many Chinese people come here and learn. We also sent people to China to educate them."

Melamed cautioned against rushing on to more futures products after the index futures launch. "It will take some time until you become more comfortable with index futures. When you become comfortable, then you will be able to do the next product."

"I believe the next one should be in the interest rate area, maybe seven-year bonds, or something of that nature, as a tool to hedge the interest rate change. That is probably the next step," he said.

"Eventually, it will also be necessary to make the RMB convertible. When that is convertible, your third market will be in foreign exchange futures but that is long way off yet," he added.

Melamed also outlined the cooperation between CME and China. "We have a cooperation agreement with most of the exchanges in China. Our reason at CME group is quite simple: we hold Chinese people in very high regard. We think they are well educated and they are getting even better in what they do," he said.

"I think the future is very good for business from China and with China. CME wants to be part of that growth and business. What we are doing is giving education, advice and information. Eventually, we want to participate. We want to be a partner with the exchange partners and with the private sector communities in China."

Melamed also shared his view of the hot issue of yuan revaluation. "My personal view has always been no foreign government can dictate that decision, and that decision has to be made by the Chinese," he said. "You cannot tell anyone when they should or when they should not revalue."