UPDATE 1-China index futures to be launched on April 16

* Long-awaited futures expected to benefit blue chips

* Short-term impact seen limited because of tight controls (Adds analyst quotes, background)

SHANGHAI, March 26 (Reuters) - China will launch trading in stock index futures on April 16, marking a long-awaited milestone in the development of China’s capital markets that is expected to lay the groundwork for more innovations down the road.

The futures contracts would be based on the CSI 300 index .CSI300 of Shanghai- and Shenzhen-listed shares, the Shanghai-based China Financial Futures Exchange, where the contracts will be traded, said in a statement on Friday.

The launch, which comes nearly three months after regulators gave the initial green light to the financial derivative, is being watched closely as a sign of China’s ability to harness financial innovation and deregulation.

“This is a milestone that will in the long run change the way in which money can be made in this stock market, and will also increase the value of blue-chip stocks,” said Zhang Yidong, analyst at Industrial Securities in Shanghai. “But in the short term, it won’t have an immediate impact on the market, as many investors, such as mutual funds, are still standing by and watching.”

China will also soon allow margin trading and short selling of shares, part of a broader stock market reform aimed at developing the country’s capital markets and building Shanghai into a global financial hub by 2020.

Stock index futures, which are agreements to buy or sell an index at the present value on a future date, would provide Chinese investors a badly needed risk-hedging tool in a stock market known for its volatility.

Initial trading is expected to be slight, with French broker Newedge Group forecasting there will be only 5,000 to 10,000 trading accounts by the time of the launch, as Chinese regulators have set the bar high for investors to contain risks.

Investors must have at least 500,000 yuan ($73,220) as initial capital to open an account to trade index futures, while the margin requirement, the collateral that needs to be set aside for trading the futures, will be at least 12 percent.

That means investors will have to place more than 100,000 yuan with a domestic brokerage to meet the margin requirement to buy just one contract, based on the current value of the CSI300 Index, which represents a portfolio of 300 leading stocks in Shanghai and Shenzhen. ($1=6.83 Yuan)