SSE Deputy General Manager Liu Xiaodong said at the "2006 Investment in China•Shanghai Forum" yesterday that with the establishment of blue-chip market, the development of institutional investors and a concept of long-term investment, the stock market might face a weak liquidity. But the problem can be solved through product innovation. The upcoming plan for the Shanghai Stock Exchange (SSE) is to promote the covered warrants of large-cap stocks.
So far, institutional investors have played an important role on domestic stock exchanges, with the market value of funds, for example, already at RMB270 billion. However, if most institutional investors believe in long-term investment, the trading volume might not meet the demand. In other words, with more and more institutional investors, the market might lack depth, which has already occurred in Taiwan. With the increasing and expanding institutional investors, the trading volume, however, declines year after year. One way to solve the problem is to create a variety of products for different investment demands through innovation. Liu revealed that the previous warrant-creation mechanism, promoted by the SSE, was not only for the market balance of supply and demand, but also for trading volume increase on the secondary market.
As for the SSE future product innovation, Liu said that the establishment of the China Financial Futures Exchange would promote index futures soon. Nevertheless, between the spot trading and index futures lies a large middle space both demanding for and allowing product innovation such as covered warrants. Upon the listing of A+H shares of Bank of China and Industrial and Commercial Bank of China, a discount was on A shares compared with H shares. This was due to a great deal of derivatives of underlying H shares, which improved the market demand and liquidity. Thus, the SSE is eager to promote the covered warrants of large-cap stocks.
According to Liu, market innovation should be based on good relationships in three aspects. One is the relationship between market supervision and market risk. In the initial stages, low-risk products are preferred and supervision should be loosened so as to give leeway for possible mistakes. The other is the relationship between policies, laws and regulations and the market demand. In the process of product innovation, the market demand, though placed in the first place, should be within the scope of laws and regulations. But at present, the market demand is sometimes head and shoulders above laws and regulations. The third relationship is between market innovation and market support. For example, promotion of margin trading and securities lending requires honesty and risk control of securities companies.
Liu also held that corporatization and going public would help improve the service. The development trend of international exchanges is unification, merger and acquisition of exchanges, clearing systems and products including spot trading, futures and fixed income products. Merger will help lower the cost, while competition should be introduced among exchanges.
