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UBS says time not right for new tools

THE time is not good now for China to start stock index futures and other derivatives due to a lack of investor confidence amid a volatile market, said Nicole Yuen, head of China equities at UBS.

"Under the current depressed market sentiment, it's not appropriate to launch index futures, or short selling and margin trading, although they have been long anticipated," Yuen said yesterday.

The key Shanghai Composite Index, which had one of the highest valuations globally, sank over 65 percent last year, hit by a heavy influx of shares, which became tradable after their lock-up periods expired, and the global and domestic economic downturn.

Yuen said it will be very difficult for China to launch stock market reforms this year and that it would be better to wait until the market stabilizes and confidence returns.

"The preparation work on such innovative products should not be scaled back," she added.

To restore confidence, listed companies should pay more cash dividends to lure investors, Yuen said.

"In the past investors bought a company's stock on expectation of its fast earnings growth, but this will change in the next one or two years because earnings will be substantially squeezed by slowing domestic and external demand," she added.

Yuen suggested that regulators should introduce a Hong Kong-style exchange traded fund to absorb a heavy share influx due to the expiry of the stocks' lock-up periods. In 1999 Hong Kong launched the initial public offering of Tracker Fund of Hong Kong to minimize disruptions to the market amid a disposal program.

Yuen also urged the regulators to allow more investment quotas to institutional investors such as China's pension fund and those under the Qualified Foreign Institutional Investor, a scheme launched in 2002 to allow more foreign investors to participate in China's capital market.

UBS, the first firm approved under the QFII scheme and with a quota of US$800 million, doesn't expect its holdings in government bonds to rise as many of its clients have again begun to invest in stocks, Yuen said.

UBS's request for an extra quota of up to US$500 million has yet to be approved. There are over 100 applications for QFII quotas awaiting the regulator's approval, Yuen said, citing market talks.


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