The inauguration came ahead of schedule, pushed by overseas exchanges launching derivative products based on Chinese stocks and currency to meet the growing hedging needs of investors.

The Singapore Stock Exchange, Asia's third-largest stock exchange, launched trading in index futures based on China's mainland-listed stocks on September 5, while on August 27 the Chicago Mercantile Exchange, the biggest US futures market, began trading futures and options on the yuan.

"Establishment of the CFFEX is a challenging innovation," said Vice-Chairman of the China Securities Regulatory Commision (CSRC) Fan Fuchun at the inauguration ceremony.

As part of the capital market reform, China has in the past two years introduced trading in a few financial derivative products such as currency swaps, interest-rate swaps, bond forwards and stock warrants.

The first product to start trading at the newly set up CFFEX will be stock index futures. But it will take months of testing before it can be launched.

Other products to be launched in the near future at the new exchange include bonds futures and stock index options, said industry sources.

The CFFEX has been set up as a joint-stock company with ownership equally shared between the Shanghai Futures Exchange, Shanghai Stock Exchange, Shenzhen Stock Exchange, Dalian Commodity Exchange and Zhengzhou Commodity Exchange, said Jiang Yang, assistant chairman of the CSRC, at the inauguration ceremony.

In comparison, the other five exchanges are non-incorporated institutions based on membership.

The registered capital of the CFFEX is 500 million yuan (US$62.5 million), equally shared by the five stockholders. The new exchange is temporarily located inside the existing Shanghai Futures Exchange.

The former general manager of the Dalian Commodity Exchange and current president of the China Futures Association Zhu Yuchen is being considered to head the CFFEX, the China Securities News reported.

The launch of trading in stock index futures, which entails a mechanism for short selling stocks, will fundamentally change China's stock market, said analysts.

Short selling the sale of borrowed securities in anticipation of a fall in price before delivery from which profits can be generated has hardly been allowed in China's 16-year-old stock market due to fears of rampant speculation.

"The trading in stock index futures will significantly enhance the presence of institutional investors in China's stock market and will help absorb excessive market liquidity," said Dang Jian, general manager of the China International Futures (Shanghai) Co.

Trading in stock index futures will also facilitate co-operation between China's futures companies and securities firms, leading to financial-service conglomerates as found in developed markets, said Dang.

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