China stock index futures set to launch -sources

MONTREUX, Switzerland, Sept 5 (Reuters) - China, the world's fourth biggest economy, is likely to launch stock index futures in November, following a communist party leadership meeting in October, industry sources said on Wednesday.

China, which aimed to launch the stock index futures in the first half of the year, postponed the plan out of concern it could destabilise stock prices.

Investors can sell cash stocks to hedge purchases of futures contracts that cause a sharp retreat of the cash market.

Industry sources attending the 28th SFOA International Burgenstock conference in Switzerland said, however, the stock index futures should be ready for launch in November and would be open to foreign investors under the Qualified Foreign Institutional Investors (QFII) scheme.

"Investors under the QFII scheme will be allowed to participate in stock futures trading, but that would be limited to 10 percent of their respective QFII quotas," said one source familiar with the matter.

The stock index futures, the first financial futures to be introduced, are expected by industry professionals to help China bring more derivatives trade related to its booming economy to domestic markets, rather than allowing foreign exchanges to take the bulk of such trade.

"The introduction of stock index futures is not going to disturb the stock markets," another source said. "Studies show there might be some volatility shortly after the futures are launched, but in mid- to long-term, the cash stock markets shouldn't be affected."

Beijing announced new regulations, which take effect from April 15, that provide a legal basis for institutions to trade financial futures, in addition to the commodities futures which are already permitted.

Shanghai-Shenzhen 300 Index, the underlying index for the upcoming stock index futures, are expected to be traded on the China Financial Futures Exchange, a new financial derivatives exchange in Shanghai formed in September 2006.

China is catching up in derivatives market development as its economy grows at about 10 percent a year.

As the Chinese yuan becomes more flexible and China's economic boom drives gains in commodity prices, Chinese firms need more ways to offset currency and raw materials price fluctuations.

Beijing plans to introduce other financial futures such as futures for interest rates and currencies, but has not indicated when. Gold and fuel oil are also on the pipeline of commodity futures.