Submitted By: Andrew Gardner

While studying financial derivatives for the upcoming finance final, I remembered an article that I read a few weeks ago in the Wall Street Journal. The article, “China Tries Long-Term Response to Stock Volatility” by James Arredy, briefly discusses the boom and bust cycles of the Chinese Stock market and suggests strategies that could be used to level the highs and lows. One of the suggestions given is the implementation of a financial futures market. As we have learned in class, a futures market gives investors the right to both buy and sell stocks. This allows investors to bet against the movement of the market, decreasing the overall volatility of stock prices.

Although China recently finished constructing the brand new China Financial Futures Exchange, the country bans the trading of all financial derivatives (sounds pretty hypocritical to me, why would you build something designed to promote something illegal?). This mandate has been in affect since 1995 when a scandal in the government-bonds-future market led to the loss of over $10 billion in minutes. With losses this substantial, China has been hesitant to reconsider a financial futures market. This has changed recently with the dramatic drop in Chinese stock prices.

China has already responded to the request for a futures market by offering limited trading of “financial futures and options related to securities, interest rates, foreign-exchange rates, as well as index-related products.” According to the Wall Street Journal article “China Widens Futures Rules’ Scope,” the rules are still strict as each firm must obtain a government issued license.

While still a small step, the recent change in policy appears to be the first movement toward widely traded index-fund futures that could help stabilize the Chinese stock market.