Shanghai starts simulated trade in equity options

The Shanghai Stock Exchange has started simulated trading in equity options, part of a drive by regulators to expand investors' risk-hedging options.

Simulated trading began on Thursday morning, the SSE confirmed to China Daily, and more than 60 securities firms took part.

The shares of Ping An Insurance Group Co of China Ltd, SAIC Motor Corp Ltd, the China 50 ETF and the Shanghai SSE180 ETF were used in the exercise.

The exchange-traded funds track the top 50 and top 180 yuan-denominated stocks on the SSE.

In early December, SSE Chairman Gui Minjie told a forum that preparations "are almost complete" for launching options on individual stocks.

Single-stock options are essentially equity derivatives, giving buyers the right - but not the obligation - to buy or sell a stock at a fixed price within a certain period or on a set date, said Tony Sun, a strategist with Shanghai Tebon Fund.

The options "will allow investors to hedge their positions more effectively. We have limited financial instruments now, but as reform continues and China's financial markets become more global, innovation is a necessity," said Sun.

China introduced equity index futures in 2008, and those instruments remain the only equity derivatives in use. The regulators expanded a pilot program in August 2012 to boost margin trading.

In February, a new pilot was launched to enable securities lending and short-selling of blue chip stocks.

"Individual stock options can be seen as a form of insurance that reduces trading risks. However, options trading prices can be very volatile. Investors still have to be aware of the risks caused by leveraging and volatility," said Xiong Jinqiu, an independent financial commentator.

The China Securities Journal reported earlier this month that the SSE may officially introduce formal equity options trading in April. Some analysts believe the move is meant to stimulate investment in China's blue chips, which have been trading at depressed valuations.

The average price-earnings ratio for the SSE, where most of China's blue chip companies are listed, stands at only 11 times 2012 earnings. On the Shenzhen exchange, which is dominated by small-cap companies, the average ratio is 28.

Change for WMPs

Another development involving the liberalization of the financial markets took place on Wednesday, this one involving wealth management products.

WMPs will be allowed to invest directly in fixed-income products on domestic securities markets, the China Securities Depository and Clearing Corp announced.

The notice said that WMPs will be allowed to open accounts at the Shanghai or Shenzhen stock exchanges. Investment will be confined to fixed-income products, including exchange bonds, credit-backed securities and preferred shares. The latter are often classified as fixed-income products because of their fixed dividend.

Analysts said that the move on WMPs is intended to provide a bridge "linking" interbank market liquidity with the nation's stock exchanges, even though WMPs can't make direct stock investments at this stage.

The outstanding balance of WMPs stood at 9.92 trillion yuan ($1.63 trillion) as of Sept 30, the China Banking Association said earlier this month.

The figure has more than doubled since the end of 2011, and it's up from 7.1 trillion yuan at the end of 2012.