Why Can’t I Trade Chinese Stock Futures?

While we’ve all been setting our DVRs to record the Bachelorette, there’s been a bit of a blood bath going on over in China. A $3.2 Trillion loss in value blood bath.

This is just the type of outlier move managed futures would love, but there’s not one fund we’ve heard of that’s making hay on the drop. Bill Gross missing the move was more of a lack of pulling the trigger. Managed Futures didn’t pull the trigger, because they can’t. There’s nothing to pull.

Where’s the Shanghai Composite futures?

Futures contracts have always been a way of doing business in the states, where farmers could hedge their crop for the season. Futures contracts for equity markets were born many decades later in the 90’s. When you put that all into context, it would make sense that the Shanghai Stock Exchange only just created their first equity futures contract back in 2010. Then in February, Options Trading was introduced, and as early as April, new contacts were introduced, via the Financial Times that would run off of the large-cap CSI 300 index.

“Exactly five years after the launch of mainland China’s first equity futures contract, based on the large-cap CSI 300 index, new futures products based on the CSI 500 and Shanghai Stock Exchange 50 began trading on Shanghai’s China Financial Futures Exchange. The move follows February’s rollout of equity options based on the SSE 50.”

Why this is relevant is because, these futures contracts (first the CSI 500) are the contracts that opened up the possibility of short selling.

“CSI 300 futures were considered a breakthrough in 2010 because they expanded investors’ ability to conduct short selling. Today, they are among the most liquid products in China’s equity market. However, the CSI 300 is made up exclusively of large-cap shares, especially banks and state-owned industrial conglomerates.”

China CSI 300 Futures Market(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: FT

And more recently, the newly launched contracts.

 “The two new futures products launched on Thursday greatly expand the short selling toolkit, especially the CSI 500 product, whose index is composed entirely of medium and small-cap stocks. Now, analysts are warning that the launch of small cap-focused futures products could spark a correction in some high-flying share prices.”

But given the recent plunge in the markets, China is regulating how much you can buy or sell per day, via Bloomberg.

Investors can buy or sell at most 1,200 new contracts linked to the CSI 500 Index per day starting Tuesday, the China Financial Futures Exchange said in a statement on its official microblog on Monday night. The CSI 500 futures contract for July delivery plunged 8.6 percent at the close. The underlying index slumped 6.5 percent, extending losses to 41 percent since the June peak.

China’s state run media is blaming rumors and foreign investors for the sell off, but it’s not all that easy to be one of those foreign investors. Why? Here’s comes the bureaucracy. First, the Hong Kong-Shanghai Stock Connect programme (which is the regulatory group for alternatives) are turning there noses to them. Second, you also have to be a QFII, a Qualified Foreign Institutional Investor. To get that title, one must have a combined quota of 80 Billion U.S. dollars.

On top of this, there are different qualifications one must meet in order to be a QFII.  For example, a fund management company must have at least 5 years of experience and 5 billion dollars in equity assets in order to invest in Chinese futures.  This is a large barrier for an investment management firm to get over and thus making it nearly impossible for Americans to investment in Chinese futures.

Not to mention – the volatility of that market would leave only a small, small allocation to the market, even if it were available for most systematic managers.  Maybe your next fortune cookie will say “Better luck buying futures elsewhere.”