China will set up a new exchange in Shanghai to trade financial futures, an industry insider said, a sign that the country is moving faster on its finance reform.

"A senior securities regulator has disclosed that State Council has given the nod to establish a financial exchange in Shanghai," said the source, referring to the official as Fan Fuchun, vice-chairman of the China Securities Regulatory Commission.

Fan was speaking at a national work conference on securities and futures regulation, which was held last week, the source said.

Fan did not elaborate on the details such as the time when the exchange would be opened, said the source.

Market watchers say the new exchange will not be established until the end of this year or early next year.

"The government's approval to set up such an exchange indicates it has recognized the burning need from the market," said Hu Jian, director of China Finance Research Center at Peking University.

"As the financial market develops, market players' demand for risk-hedging tools also grows. That's exactly what the new bourse could offer," Hu said.

"It's a milestone in China's finance reform and a boost to Shanghai's ambition to become a world financial hub."

But analysts also warn that the trading of derivatives product could turn out to be a problem.

"Trading of financial derivatives is also associated with high risks, so how it will function well largely depends on how it is regulated and how market players' internal risk control system are," said Xue Jirui, a financial derivatives analyst with CITIC Securities.

Financial derivatives were once traded in China in early 1990s but were then plagued by wild market speculation. A scandal involving State Treasury bond futures in 1995 prompted the government to ban derivatives trading.

The decision to set up a separate exchange to trade financial futures is seen by some as a move that will hold back the development of the current three commodity exchanges in the country.

"Setting up a new exchange to trade the financial futures, rather than allowing the existing exchanges to trade the financial futures, is a waste of resources," said a senior manager at research and development section of the Zhenzhou Commodity Exchange.

"If we were only allowed to trade commodity futures, then our breath space is seriously limited," the manager said.

(China Daily January 17, 2006)