A Study On China's Financial Derivatives Innovation Of Transitional Economy

These days, the international financial markets are keeping changing, financial products and services are under their way of innovation, and the knowledge of derivative financial products has become the necessary ones for ordinary investors. International derivative product markets have developed rapidly since 2000: the annual growth rate of trading amount is around 25.9% from 2000 to 2005, and 43.4% for the trading amount of options; the nominal principle balance of global over-the-counter derivative products rise from 95,000 billion in 2000 to 338,600 billion in Jun. of 2006. The game of information, knowledge and wealth spreads on the financial derivative market so that we can not ignore it anymore.Innovation lies in practice, that is to say, innovation is meaningless if it is just an opinion, thought or something of institution and cannot be transferred to actions and results. The innovation of financial products is seen as special tools for large financial institution to bring new chances for them to begin new firms or services. As for innovation, the success does not depend on whether it is new, cute or scientific, but on whether it can win the market. It is common sense that the one who cannot be innovative will be left behind to other stronger competitors. For China, the point is that we still be passive when other countries have already put such financial theories into practice. Thus, how to enter the market should be checked at first when we judge whether Chinese financial industry has the ability of innovation.Thus, the following questions should be analyzed firstly when we research the issue of Chinese financial derivative product innovation:(1) How to enter the market should be checked at first when we judge whether Chinese financial industry has the ability of innovation. The following questions are: whether there is a market-oriented innovation mechanism? Who, government or financial institution will be more powerful in the process of financial product innovation? Are there any drawbacks in such"Chinese Special" innovation process? How could such innovation be more international as with China be more open?(2) China should be the most fast-developing place for financial innovation; diversified financial tools can be used to hedge and manage the risks in the economy. It is very problematic for China to use the experience of others although it may solve some issues in relative short time. Although the development of financial products of China has been advanced by the government up to present, the innovation at this time has clear character of"bring-in"because of the constraints of external institution and external environment, and cannot meet the demand of financial competition and domestic economical development after joining WTO. Therefore, what factors other than technology or external environment hinder the financial innovation of China?(3) All the countries in the real world has their own"fluent"custom system, which reflects the habit of culture, behavior criteria, common social expectation and the way to put the expectation to the daily business; thus, culture difference should be considered when trades are transferred from one culture to another. The custom system of China will, to what extent, influence on the process of financial derivative product innovation and investor behavior?Thinking of above issues could provide a basic analyzing framework for research on the case of financial derivative product innovation in transition economy of China. The key point of this paper is not to describe basic concepts of financial markets, but to how to put these concepts or theories to Chinese practice, and to localize such practice to become one of the necessary part of Chinese market economy.Financial revolution is an important or even kernel part of Chinese economical revolution. Gradual economical revolution partly means controlling the financial resource or guiding the financial revolution and development. The financial derivative innovation of China in transition period almost due to the change of institution, but the change could not be the only reason for"self-innovation". So, the advance of the financial institutions in addition to the trading exchange building or asset pricing technology contribute to the development of financial derivative innovation in China. The basic points in my framework are as follows:(1) Government regularity and trend to be more market-oriented could be two clues to observe the innovation of financial derivative products in China: the innovation in China partly due to the demand of market participants to avoid financial regularity or taxation and accounting standard, and partly of investors to reallocate financial risk.(2) Attention of researchers should be transferred from institution revolution to the function of financial derivative products and investors'benefits.(3) The function of government is of the great importance in the process of financial derivative innovation in China. That means, the government should create a proper environment, condition and mechanism for innovation. Government should pay more attention to the building of financial market mechanism, incentive mechanism and institution revolution but not the fate of single institutions. The history of financial innovation in China demonstrates that innovations that because of the press from government should be avoided.(4) The particular stage in economical development and the occurrence of important issues is the start point of innovation research. Compared with western countries, the disadvantage of China is analysis technology while the advantage is the fluent financial phenomenon in the transitional economy. It is necessary for the researchers to do empirical studies using the typical cases of China's financial system.(5) Financial derivative products should develop on the basis of external demand, China should take its own advantage to design institution and risk management semantically. Government should take measures to: firstly, make general plans for the institution innovation that matches with the financial derivative product development; secondly, foster an ability of free experiment environment by arranging certain institutions.Based on above basic framework, this paper analyses recent financial innovation of China, which focus on securitization, bond forward, interest swap, RMB forward, etc. Then I provide policy suggestions based on such analysis.The innovations of my paper are: (1) building up a basic framework based on the facts of transition economy of China; (2) adopting empirical analysis through the research of typical cases of China's financial system; (3) analyzing the financial product innovation since 2005 and providing policy suggestions.