China is considering launching warrant certificates on the domestic stock market, which experts say might offer a new approach to the ongoing experiment of State share sales.

Late on Monday, Shanghai and Shenzhen stock exchanges published draft circulars about the issuance of warrants, a new financial tool which shelters investors from stock risks.

A warrant gives the holder the right but not the obligation to buy or sell an underlying security at a certain price, quantity and future time. The issuer of the warrants can be a listed firm or third party, according to the circulars.

The circulars also specified that listed firms issuing warrants should have at least 200 million negotiable stocks, whose market value should be no less than 1 billion yuan (US$121 million) in the 20 trading days leading up the issuance. And the changing-hands rate should be above 25 percent in the 60 trading days before issuance.

Warrants are widely used on the international market. They are a useful financial tool in offering significant gains to investors during a bull market. They also offer protection to investors during a bear market. This is because warrant holders can sell stock to issuers at a promised price even if the share price begins to drop.

Moreover, if used in China, warrants could offer a new path for the current share structure reform, said Hua Sheng, the economist who came up with the idea of using warrants to push market reform.

Listed firms can issue free "put warrants" to tradable shareholders, which empower them to sell a certain amount of shares to the original non-tradable shareholders at a specified price, on or before a stated date if the share price falls when all the shares are floated, he explained.

Circulars are currently under discussion and seeking market advice.

The price of the warrants is a big issue, which will decide how much compensation the public shareholders get form the tradable shareholders, said Liu Haobo, an analyst from CITIC Securities.

Although this is a new method, a lot of things should be taken care of by it, said Wang Kai, a senior analyst from China Securities.

Warrants had been launched when China established its stock market in 1992, but they were abolished in 1996 due to their abuse by market speculators, he said.

(China Daily June 15, 2005)