China stock index futures rise in debut; cash market falls

* Futures contracts end higher on opening day in good volume

* Launch may pave way for more innovation in China markets

* Investors relieved trade not too volatile

* Foreign participation could come fairly soon

* Overall share market down on property policy tightening (Updates to futures trading close, adds detail)

By Jason Subler and Lu Jianxin

SHANGHAI, April 16 (Reuters) - China launched its first stock index futures on Friday, a milestone in the development of the country's relatively young financial markets, with initial signs of a warm welcome from investors hungry for new trading tools.

At an opening ceremony at the China Financial Futures Exchange (CFFE) in Shanghai's financial district, officials addressed investors and guests from overseas exchanges, with red banners on the walls proclaiming the occasion.

When the electronic board at the front of the room showed all four contracts <0#CIF:> rising after the opening gong, the crowd grew loud with excitement.

"The last thing regulators wanted to see was too much volatility," said a manager at a futures brokerage. "Since prices did not fluctuate too much and the market appeared to be going in the desired direction, people were relieved."

The nearest contract, to be delivered on May 21 CIFK0, opened up 1.3 percent from the base value of 3,399 points set for all the contracts. It fell back slightly in afternoon trade to close up 0.5 percent, at 3,416 points.

The rise in the futures, accompanied by much higher than expected trading volume, contrasted with a fall in the spot share market, in part as some investors shifted funds into the new market and away from the underlying shares.

The benchmark Shanghai Composite Index .SSEC closed 1.1 percent lower as property shares were hit by fresh government measures to cool surging home prices, including increasing mortgage rates and down payment requirements. [ID:nTOE63E08N]

The CSI300 .CSI300 index of the largest firms by daily turnover and market capitalisation on the Shanghai and Shenzhen exchanges, on which the futures are based, also fell 1.1 percent.

Some analysts expect that index quickly to replace the Shanghai Composite as the benchmark now that the futures have been launched, as investors focus more on index heavyweights. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ ^ Take a look on the index futures [ID:nSGE63E0C7] Reuters Insider show on futures link.reuters.com/saq97j Graphic on top firms in CSI300 link.reuters.com/pat97j Graphic on Shanghai, HK markets link.reuters.com/vat97j ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ ^> Plenty is riding on the success of the futures market as China looks to expand and deepen its financial markets and attract more sophisticated investors.

For one, futures are expected to give investors a vital tool for hedging, helping to ease the wild swings that have characterised Chinese markets in the past and making it possible for them to use a broader range of investment strategies.

About 70 percent of spot share market turnover comes from retail investors, who often end up following the crowd, increasing volatility, while most of the wealthy individuals who currently dominate futures trading are relatively experienced.

If things go smoothly, the futures could herald the start of a fresh round of innovation, leading to more products that will help the country's markets develop towards becoming a global financial centre, as the government aims to engineer by 2020.

While the futures are currently not available to foreign investors, many are hopeful that Qualified Foreign Institutional Investors (QFII), who may participate in the capital markets through a quota system, will be allowed in sometime soon.

Exchange officials have said in private that if the index futures proved to be a success, the next product -- options on the futures -- could be launched within a year.

Equally important to the positive pricing on the debut, the volume of futures trading surprised on the upside. With 58,500 lots traded in total for turnover of 605 million yuan ($89 million), activity was far greater than analysts had expected.

"Such a debut gives us confidence that the turnover of the index futures could reach roughly the same level as for China's commodity futures," said Liu Zhongyuan, chief economist at Xiangcai Qinian Futures in Shanghai.

Combined turnover of China's three commodity futures exchanges in Shanghai, Zhengzhou and Dalian was 130 trillion yuan ($19 trillion) in 2009, the world's biggest commodity futures market, with average daily turnover of around 500 billion yuan.

The longer-term index futures contract suggested investors remain confident about the prospects for growth and corporate earnings in the world's third-largest economy, despite near-term worries about overheating and potential policy tightening.

In the cash market, immediate concerns about tougher mortgage requirements announced on Thursday weighed on property shares.

Developer and construction firm China State Construction Engineering Co (601668.SS) fell 0.5 percent, and China Vanke (000002.SZ) fell 0.8 percent.

Hong Kong shares also retreated on the new property measures, with the Hang Seng Index .HSI down 1.3 percent. [.HK] (Additional reporting by David Lin; Editing by Kim Coghill)