It was virtually inconceiv­able that the US Federal Reserve would not launch a new round of quantitative easing — nicknamed QE2 — on Wednesday.

The central bank had thoroughly prepared the ground for the monetary stimulus, with Ben Bernanke, its chairman, talking of “a case for further action”, and William Dudley, president of the New York Fed, saying: “The current situation is wholly unsatisfactory.”

Equity prices had rallied, expectations of future inflation had risen and the dollar had fallen in expectation of QE2. Inaction by the Fed would have risked a sudden reversal of these moves and a catastrophic loss of market confidence.

But the Fed still had decisions to make. It had to decide how much to buy “up front”; it had to decide how fast to buy assets. Most crucial of all, it had to decide what to signal to markets about how big QE2 could eventually become.

It chose to announce an initial $600bn, bought at a speed of about $75bn a month, with no explicit signal about whether it is more likely to increase or decrease the target total.

The $600bn by the end of the second quarter of 2011 means that the Fed has leaned towards giving the markets certainty about the path of purchases. It is not “shock and awe”, such as the huge purchases announced during the financial crisis, but it is also a long way from a totally conditional, meeting-by-meeting approach.

The speed is a little more cautious than estimates that the Fed could buy between $80 and $100bn a month. That may partly reflect the $35bn a month that the New York Fed now thinks it will need to buy to reinvest early repayments from the Fed’s portfolio of mortgage-backed securities.

Total purchases per month will, therefore, be about $110bn, and the Fed made clear it would review the speed of the programme. If could speed up or slow down purchases to reflect conditions in the bond market and the rate of mortgage repayments.

But the biggest surprise is that the Fed has not chosen to signal any bias towards increasing the size of QE2 once the initial round of $600bn in purchases is complete. It simply said that it would review QE2 “in light of incoming information and will adjust the programme as needed to best foster maximum employment and price stability”.

From the point of view of Fed officials, that is the correct balance between leaving the door open for further purchases and making sure that any decision to expand asset purchases is truly conditional on the incoming economic data.

The Fed is willing to do more, and the lack of forward guidance is not meant as a signal that QE2 will end at $600bn. But the Fed will adjust the size of the programme only if the economic outlook suggests that it is necessary once the $600bn has been absorbed.

Fed officials think $600bn should make a meaningful difference to the economic outlook. But the Fed says in its statement: “[It] will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.”

In particular, a number of Fed officials want to see unemployment continue to decline from its current level of 9.6 per cent, and they want to see forecasts of inflation rising back towards their objective of “about 2 per cent or a bit below”.

Based on past statements by Fed officials, a $600bn move is equivalent to a shift of about 75 basis points in the federal funds rate.

If the bank does change the amount in the future, it is likely to do so only in relatively large increments and not a few tens of billions here or there.

Individual Fed officials are likely to elaborate on the conditions under which they might want to increase or decrease the size of QE2 in speeches once the committee comes out of “blackout” next Monday.

The Fed also avoided two other possible changes it could have made to policy. It continued to pledge that interest rates were likely to remain at “exceptionally low levels” for an “extended period”. It also chose not to increase massively the duration of its asset purchases by buying a lot of Treasury bonds with 20 or 30 years to maturity.

China is developing a “Twelve Five years” (2011-2015) plan that will be the focus of economic growth, “external demand” to “domestic demand growth”, stressed the need to establish long-term mechanism to expand consumer demand, drive economic growth in the “three carriages “for the first time the consumer is king. The experts, the authorities should consider the consumption rate back into the “second five” index system, to help promote consumption.

Effort to promote  growth in consumption and investment

Fifth Plenary Session of 17th CPC communique pointed out that “second five year” plan to adhere to the strategy of expanding domestic demand, the establishment of long-term mechanism to expand consumer demand to speed up consumption, investment and exports growth situation. In particular, in the traditional “three carriage”, the consumption for the first time ranked first, highlighting its important role in economic growth.

Analysts refer to “second Five Year Plan” main line is the adjustment of economic structure, and the key to success is to expand domestic demand and promoting consumption. In fact, the impact of financial crisis China’s economy, leading to a serious setback in the case of exports, economic growth must be counting on domestic demand, making it an important economic growth point in the future.

CSC chief macroeconomic analyst Wei Fengchun, the authorities stressed the need to “adhere to the strategy of expanding domestic demand,” “establishment of a long-term mechanism for expanding consumer demand”, referring to the expansion of consumer demand, so that the relationship between consumption and income more closely, consumer and more matching investment mechanism, the rise in income levels and consistent increase in the level of GDP.

Consumer advocates satisfied repeat rate “Twelve Five”

Weifeng Chun pointed out the need to expand consumption demand will increase spending power. From the expansion in terms of labor income, mainly to enhance wages, increased subsidies for low-income persons; from the consumer point of view, is to reduce consumer prices, increase consumption.

In “Twelve Five” plan to develop a new transport expert Lee said that China mainly relies on investment to promote economic growth, income growth rate of GDP growth has been slower than the same period, the long term this phenomenon is not sustainable, economic growth requires a strong and strong domestic demand. In the “Tenth Five Plan” has been with the consumption rate index (see “Knowledge Base”), should be back on the “second five” planning target system.

How to expand domestic demand and promoting consumption, vice president of Sun Lijian of Economics, Fudan University that, since a large number of low-income people, so that the overall spending power of China is extremely limited, the Government should be in the “five-second” period to create more employment opportunities ability to low-income consumer.

BEIJING (Dow Jones)–China President Hu Jintao on Wednesday urged the country to speed up the transformation of its economic development, according to a statement posted on the central government’s Web site.

China should rely less on investment and exports for economic growth and instead shift to a balanced reliance on a mix of consumption, exports and investment, Hu said, according to the statement.

China must also increase the contribution of services and the agricultural industry to economic growth, he said.

The foundation of economic recovery is still not solid and the financial crisis has highlighted problems in China’s development, he said.

Hu reiterated that China will strive to maintain fast and stable economic growth.

Hu’s comments are among the strongest yet from the Chinese leadership on the long-standing goal of adjusting China’s economic growth pattern.

Transforming China’s economic growth model is the only way to fulfill the Communist Party’s commitment to improve the daily lives of the Chinese people, he said.

-By Aaron Back and Patricia Jiayi Ho, Dow Jones Newswires; (8610) 8400 7702; patricia.ho@dowjones.com

What is AsiaHedge Awards 2009?

The AsiaHedge Awards celebrated the top performing hedge funds in Asia-Pacific in 2009. Now in its seventh year, the awards bring together both international and Asian managers and investors to acknowledge the achievements of the best in the industry.

The Real Return Asian Fund, managed by Ezra Sun of Veritas Asset Management, took the plaudits of more than 200 leading figures in the Asia-Pacific hedge fund industry as he collected the AsiaHedge Fund of the Year Award for 2009 at the AsiaHedge Awards on 22 October.

The much-coveted Management Firm of the Year award was won for 2009 by Henderson Global Investors, which had no less than four of its Asia-focused funds nominated in the various categories.

The strong turnout and upbeat mood at the dinner, which was being held for the eighth time, also demonstrated – after two years of extraordinary turmoil in the global markets – that the hedge fund industry in the Asia-Pacific region has very much survived, and indeed appears well positioned to thrive again after a year when many funds again delivered strong returns.

In an Asia-Pacific industry that is spread across various markets and featuring players based in a number of different locations, the awards were won by a mixture of big international firms and regionally-based players.

Among the major international firms that took awards, in addition to Henderson there was also Brevan Howard, which won the International award again for its Asia macro fund; and also Marshall Wace, which won the award for best Asia including Japan strategy for Asia Diversified TOPS fund.

HSBC won the award for best Single Country fund for its India hedge fund strategy managed by Sanjiv Duggal.

Regional boutiques that won included HT Capital for its Amoeba small cap strategy, and Riley Paterson for Asia ex-Japan.

A best China fund category was awarded for the first time this year, reflecting the rapid growth of dedicated China-focused hedge funds, with the inaugural winner being LBN China+ Opportunity. The long-established best Japan fund category was won by Hadoh, while another Japan-focused strategy – Prowess of Japan – took this year’s Arbitrage & Market Neutral award.

After being nominated on several previous occasions, the Fixed Income award was taken this time by Tribridge.

Evenstar and Phalanx, two new contenders at the awards, took the Event Driven and Multi-strategy categories. And the New Fund of the Year award went to Joe Chan’s new Galaxy China Deep Value fund.

The full list of this year’s final nominees and winners was as follows:

Asia ex-Japan
K2 Asian Absolute Return
Platinum Asia
Riley Paterson
Sofaer Capital Asian Hedge Fund

**WINNER: Riley Paterson**

Asia inc Japan
Greater Asian Hedge Fund
JF Asia Absolute Return
Marshall Wace Asia Diversified TOPS Fund
Real Return Asian Fund

**WINNER: Marshall Wace Asia Diversified TOPS Fund**

Japan
Akamatsu
Asuka Japanese Equity
Hadoh
Henderson Japan Absolute Return
Henderson Japan Select Absolute Return
PK Japan

**WINNER: Hadoh**

China
Ajia-Lighthorse China Growth Strategy
Dragon Billion China
Golden China
LBN China+ Opportunity
Pinpoint China
Pure Heart China Growth
Triskele China

**WINNER: LBN China+ Opportunity **

Single Country
Agora Absolute Return
BGI Australia Absolute Equity
HSBC India Alpha
K2 Australian Absolute Return
PXP Vietnam

**WINNER: HSBC India Alpha**

Small & Mid-Cap
Boyer Allan Pacific Opportunities
Frontier Asia
HT Asian Alpha Amoeba
Tiedemann Japan QP Small Cap Portfolio
Yaraka

**WINNER: HT Asian Alpha Amoeba**

Event Driven
Evenstar Sub Fund I
HDH Master Fund
Owl Creek Asia
UG Hidden Dragon Special Opportunity

**WINNER: Evenstar Sub Fund I**

Arbitrage & Market Neutral
Artradis Barracuda
CITIC Securities Alpha Leaders
DB Equilibria Japan
Northwest China Opportunities Fund
Prowess of Japan
Richland Asia Absolute Return
Titan Asia Volatility

**WINNER: Prowess of Japan**

International
BlackRock Asset Allocation Alpha Fund
Blue Sky World
Brevan Howard Asia
PMA Harvester
Platinum International

**WINNER: Brevan Howard Asia **

Fixed Income, High Yield and Distressed
ADM Galleus
Alphadyne Investment Strategies – Asia Rates Trading
Tribridge
QBridge

**WINNER: Tribridge**

Multi-Strategy
Asuka Opportunity
Henderson Asia Pacific Equity Multi-Strategy
LIM Asia Multi-Strategy
Northwest Fund
Phalanx Japan Austral-Asia Multi-Strategy
Pinpoint Asia Strategies
Rohatyn Group Asia Opportunity
Segantii Asia-Pacific Multi-Strategy

**WINNER: Phalanx Japan Austral-Asia Multi-Strategy**

New Fund of the Year
Artradis Asian Convertible Bond Fund
Galaxy China Deep Value Fund
Henderson Asia Select
Pure Heart Natural Selection Fund
Strategic China Panda Fund
Wisdom of Japan Fund

**WINNER: Galaxy China Deep Value Fund**

Management Firm of the Year
Asuka
Henderson
K2
Martin Currie
Platinum

**WINNER: Henderson**

Fund of the Year
Bevan Howard Asia
HDH Master Fund
Prowess of Japan
Real Return Asian Fund
Riley Paterson
Tribridge

**WINNER: Real Return Asian Fund**

Hedge funds have acquired a fearsome reputation in recent years, largely because people still remember how George Soros’s Quantum Fund helped to force the pound out of the European exchange-rate mechanism in 1992.

The irony is that, despite their high-risk image, hedge funds were originally designed to protect against risk, rather than maximise it.

So here is a quick explanation of what hedge funds are, how they operate and how you can invest in them.

What is a hedge fund?

An investment that aims to make money year in, year out, no matter what the financial climate (known as an absolute-return strategy). How to define hedge funds is tricky because it is an umbrella term for a huge range of different investment strategies and risk levels. One thing that they have in common is that wealth preservation – not losing money – comes very high up the list of priorities.

Why do they seem so scary?

Their sheer size (many funds are worth billions of pounds) is enough on its own to command attention, but it is the frequency with which they trade that gives them a profile even bigger than their size alone would merit. Market experts reckon that hedge funds account for as much as 50 per cent of all trades on the London Stock Exchange.

When hedge funds combine to bet on a particular outcome, as they did with the pound in 1992, even governments can find themselves powerless to resist the momentum they generate.

How do hedge funds work?

They use a number of strategies to make money for investors. Perhaps the most notable is the long-short equity strategy. This allows the fund manager both to “go long” – the traditional approach of buying an asset in the hope that it will rise in value – and to “go short”. The latter is when the fund manager sells a borrowed asset in the hope of buying it back more cheaply later.

Another approach is arbitrage, where the fund manager takes advantage of anomalies in the pricing of assets. For example, when a company’s shares are quoted in two different countries, arbitrageurs may see a slight advantage in buying the shares in one country rather than the other. To see arbitrage in action, use an online calculator.

A third method of making money is to take a significant stake in a company in the hope that a profitable takeover or management shakeout will follow.

Are hedge funds suitable for the man in the street?

There are a number of hurdles that a typical private investor needs to clear before putting money in a hedge fund. The first is that the initial investment required is usually very high. It is rarely less than £50,000 and can be £1 million or more, which rules out all but the wealthiest investors.

Hedge funds are based offshore and are not regulated by the Financial Services Authority, so the usual warning about seeking advice before buying applies with extra force in this case.

Although not all hedge funds are high-risk, some of the strategies used by some of the funds undoubtedly are. For example, the use of specialist instruments known as derivatives offers highly geared bets on the future price of things such as shares or commodities, and investors need to be sure that they appreciate the level of risk. Hedge funds typically use leverage. This involves borrowing additional money to increase the size of the bets they are taking.

How much is Hedge Fund Fee?

Quite a lot. Hedge funds typically charge 2 per cent a year in annual fees, plus a performance fee of 20 per cent or more of any rise in the fund’s value. Performance fees are rewards to managers for achieving a certain level of return. The idea is that by offering these incentives the fund ensures that both the managers and the investors have a strong interest in the fund doing well.

Does the performance of these funds justify the high fees?

It is impossible to give a blanket answer to that question, but it is certainly fair to say that the high charges act as a drag on performance.

For example the average return on European hedge funds in 2008 was a little less than 10 per cent, according to HedgeFund Intelligence, the industry information group. This compares with the return of 18.1 per cent posted by ordinary European equity funds.

However, hedge funds fared much better in the bear market of 2001 and 2002. While the stock market was down 45 per cent, hedge funds were up by between 1 per cent and 2 per cent. Because hedge funds aim for absolute returns, they tend to perform better than the stock market in bad times but less well in good times.

How do you go about buying a hedge fund?

Your financial adviser should be able to point you in the right direction, but you will need a substantial initial sum and could be buying into a very risky investment.

Charles Cade, of Winterflood Securities, the stockbroker, says that he would not recommend direct investment in hedge funds. A better route would be a fund of hedge funds. These invest in a number of different funds and there are more than 20 listed on the London Stock Exchange.

But these, too, have drawbacks. They usually charge another layer of performance fees on top of those levied by the underlying hedge funds, and like hedge funds, they are not regulated by the FSA, though the watchdog is thinking about bringing some funds of hedge funds under its regulatory umbrella.

Industrial & Commercial Bank of China Ltd., the world’s largest lender by market value, and rivals fell in Hong Kong trading after the People’s Bank of China unexpectedly raised the proportion of deposits banks must set aside as reserves.

ICBC dropped 2.4 percent to HK$6 as of 10:06 a.m. local time, the lowest since Oct. 7. China Construction Bank Corp., the nation’s second-largest lender, declined 2.5 percent, while Bank of China Ltd. fell 2.4 percent and Bank of Communications Ltd. lost 2.9 percent. Shares of smaller lenders also declined.

China’s central bank boosted the reserve-ratio by 50 basis points starting Jan. 18 to cool the world’s fastest-growing major economy as a credit boom threatens to stoke inflation and create asset bubbles. Economists hadn’t anticipated such a move until at least April and the policy shift may foreshadow higher interest rates and a relaxation in the nation’s currency peg against the dollar.

“The move in itself is not a surprise, but the timing is a bit earlier” than analysts had expected, Credit Suisse Group AG Hong Kong-based analysts Sherry Lin and Daisy Wu wrote in a note today. “Banks’ shares are likely to be sold off in the near term as the fear of tightening looms.”

Yesterday’s decision will help remove about 300 billion yuan ($43.9 billion) of liquidity, according to estimates by Xing Ziqiang, an economist in Beijing at China International Capital Corp. Chinese banks extended a record 9.21 trillion yuan of loans in the first 11 months of 2009, more than double the total for the same period a year earlier, according to the central bank.

New Loans

In Shanghai trading, Industrial Bank Co., part-owned by Hong Kong-based Hang Seng Bank Ltd., tumbled 5 percent to 35.02 yuan, while Bank of Beijing Co. dropped 4 percent. Shenzhen Development Bank Co. fell 3.8 percent.

The move by the country’s central bank was partly triggered by faster-than-expected growth in new loans in the first week of 2010, according to Ma Jun, the Hong Kong-based chief economist at Deutsche Bank AG.

China’s banks lent 600 billion yuan in the first week of January, the Economic Information Daily, a newspaper affiliated to the state-run Xinhua news agency, reported on Jan. 11. That compared with 294.8 billion yuan for the whole of November.

The existing reserve-requirement level for large banks is 15.5 percent, and 13.5 percent for smaller lenders. In November 2008, the central bank named ICBC, Agricultural Bank of China, Bank of China, China Construction Bank and Bank of Communication among those classed as bigger lenders for such requirements.

–Luo Jun. With assistance from Li Yanping, Paul Panckhurst, Stephanie Wong and Irene Shen. Editors: Joost Akkermans, Malcolm Scott.

To contact the reporter on this story: Jun Luo in Shanghai at +86-21-6104-7021 or jluo6@bloomberg.net

To contact the editor responsible for this story: Philip Lagerkranser at +852-2977-6626 or lagerkranser@bloomberg.net

In 2009, emerging markets flew higher than a frigate bird, with the MSCI Emerging Markets Index returning 74.5 percent. Latin America, the top performer among MSCI’s developing-market indexes, returned nearly 98 percent.

Higher car sales may be a harbinger of prospects for China, now considered the world’s largest auto market as it moves to a more consumer-based economy.

As investors scurried to cash in, emerging-market mutual funds swelled, attracting more than $80 billion in new money, according to EPFR Global, a tracker of market data in Cambridge, Mass. That was the highest annual inflow since EPFR began keeping track, beating the previous record by more than $25 billion.

Those kinds of numbers, at a time when economies in the United States, Europe and Japan are ailing, have raised the possibility that emerging markets are surging toward an investment bubble.

“A lot of the emerging markets have bounced back strongly from last fall and now look a little on the expensive side,” said John R. Chisholm, co-manager of the Acadian Emerging Markets fund. Mr. Chisholm’s fund, which invests throughout the developing world, had a total return of 77 percent last year.

Emerging-market stocks have long been among the most volatile investments, zigzagging more, on average, than developed-market shares. In 2008, when the Standard & Poor’s 500 index dropped 38.5 percent, the MSCI Emerging Markets Index fell 54 percent.

Returns in developing markets have regularly been sapped by crises, like the Mexican peso devaluation in 1994 and the Asian financial flu in 1997. The announcement in November that Dubai would delay repayment of some of its debts raised the possibility of yet another round of woe.

Because of the possibility of future blow-ups like these, advisers have long said that average investors should put only a small portion of their assets, if any, into emerging markets. Yet some investment professionals have begun to question whether today’s developing world is really as risky as its reputation — and to suggest that less sophisticated investors might consider putting more of their money there.

Jim O’Neill, head of global economic research at Goldman Sachs, is among the best-known proponents of that view. In 2001, Mr. O’Neill coined the acronym “BRIC” as shorthand for the four largest economies in the developing world: Brazil, Russia, India and China. He argues that these countries, with hefty populations and solid economic fundamentals, should outpace the developed world over the next several decades.

“Because of the financial crisis, some people started to believe the BRIC thing was finished,” Mr. O’Neill said. “I’d argue that three of the four — especially China, but also Brazil and India — have demonstrated that they can live without U.S. growth leadership.”

Those three have resumed strong growth, despite the struggles in the developed world. Russia has lagged because of dependence on oil and gas, whose prices fell sharply with the recession. “It’s easy to dismiss Russia after oil prices lost 75 percent of their value in six months,” Mr. O’Neill said. “Let’s see later this year how they’re doing.”

The overall recent performance of emerging markets has led Jeremy J. Siegel, a finance professor at the Wharton School of University of Pennsylvania, to conclude that they may be a better deal today than just a few years ago. “They’ve weathered a severe shock very well,” he said. Thus, investors aren’t foolish to buy the shares, even after the recent rapid price rise, he said.

The average price-to-earnings multiple for Chinese listings, for example, was in the low 20s in late 2009 and was projected to be 18 or 19 this year, he said. “That’s not cheap, but it’s not crazy for a rapidly growing country,” he said. “It’s not the 50 of 2007, when I was saying don’t go in there.”

Edmund J. Harriss, investment director at Guinness Atkinson in London, pointed to car sales as a harbinger of prospects for China and other big emerging markets. He said China would probably report 12 million sales for 2009, beating the United States by two million. “The size of the emerging economies is reaching a stage where they can sustain big growth in personal consumption,” he said. “If you get that, you should be looking to invest. That’s what drove America from the 1950s onward.”

Mr. Harriss oversees three Guinness Atkinson funds. The largest, the China & Hong Kong fund, had a total return of 92 percent last year. Among its biggest holdings at midyear were China Mobile, a telecom, and the China National Offshore Oil Corporation.

Even proponents caution that emerging markets, despite their promise, remain risky. If a big crisis arises — perhaps widespread political unrest in China — it could sow broader panic, with investors fleeing as fast as they piled in. “Be aware that you can easily lose half of your investment in a few months,” said Mr. Chisholm of Acadian.

Risk is the reason that Towers Perrin, the employee-benefits consultant, often steers retirement plan managers away from including emerging-markets funds in 401(k) plans, said Darrell S. Zechman, a consultant in its Chicago office.

Many Americans don’t understand that investments in markets outside the United States entail currency and political risk along with the usual stock-market zigzags, he said. Such investors may also time investments poorly. “Traditionally, this is an asset class where people chase returns — they read in the news about a huge run-up and dump a lot of money in just before the market turns,” he said. “They get in at the peak and ride down to the trough.”

Towers Perrin typically suggests that retirement plans offer broad-based international funds, which can invest in any market outside the United States but keep most of their money in developed ones, Mr. Zechman said.

INVESTORS considering emerging markets might also want to ponder bird dung. Both bird droppings — specifically, guano deposited on Peruvian islands — and financial assets have produced speculative frenzies, said Kenneth S. Rogoff, an economics professor at Harvard and an author of a recent book on financial crises.

In the 1800s, foreigners became enchanted with guano’s promise as a fertilizer and scooped up Peruvian bonds, Professor Rogoff said. Soon enough, the boom went bust, and Peru defaulted on its debt, wiping out the investors.

“It’s comical from a 21st-century perspective,” he said. “But guano was a huge technological advance for farming at the time.”

China took a major step Friday toward making its capital market system more sophisticated and perhaps more stable as it agreed to give investors a new and powerful set of risk-management tools, The New York Times’s David Barboza reports from Shanghai.

The government said it had approved, “in principle,” the creation of stock index futures, trading on margin and short selling, investment tools that are commonly used in New York, Chicago, London and many other financial markets, according to Xinhua, China’s state run news agency.

The announcement means that for the first time investors in China have more options than simply buying and selling their favorite stocks. They will soon be able to invest in a stock index (or set of stocks, collectively) and borrow money to trade stocks on margin.

Investors will also be able to make financial bets that stock prices will fall, a practice called short selling.

“This is a major step for China’s capital markets,” Chang Chun, a professor of finance at the China Europe International Business School in Shanghai, told The Times. “The government has been studying this for a long time.”

The China Securities Regulatory Commission said on its Web site Friday that it may take three months to complete preparations for the new investing tools to become available.

“This improves the stability and the healthy development of the capital markets,” the C.S.R.C. said in its statement.

By approving the new tools, the government hopes to accomplish several goals, including giving Shanghai more credibility as a financial capital and encouraging more ordinary Chinese to invest in equity markets. Many households still keep a large amount of their savings in low-interest accounts at state banks.

The announcement Friday did not come as a surprise to investors here.

Rumors that such an announcement was imminent have excited market players in recent days.

They drove up the share prices of Chinese brokerage houses, which expect to cash in on the new rules by making margin loans to investors and giving them additional options to hedge their risk.

Jing Ulrich, chairman of China Equities and Commodities at JPMorgan Chase, said in a report released late Friday that the new investment tools will help institutional investors who want to hedge and reduce volatility in a market that is known for wild price swings.

Mainland China’s benchmark Shanghai Composite index almost doubled in 2007, then slumped 65 percent in 2008 before rebounding about 80 percent last year.

The government has been eager to offer investors additional tools for some time.

In 2006, Beijing established the China Financial Futures Exchange in Shanghai. Since then, regulators have been testing stock index futures, short selling and margin trading.

But regulators delayed approving the practices because of the global financial crisis and because of worries that such trading could disrupt the country’s volatile stock exchanges in Shanghai and Shenzhen, analysts say.

The Chinese government has worried that short selling and trading on margin in particular could be abused by investors and increase speculation and chaos in the market.

Short selling and derivatives trading have come under sharp scrutiny in the United States and elsewhere, because of similar worries about whether they improve or distort markets. In 2008, the United States and other countries imposed a temporary ban on short selling of financial stocks. The bans were lifted after several months.

The Shanghai and Shenzhen exchanges only began to take shape in the early 1990s, when Beijing pushed to develop a financial market system. Exchanges in Hong Kong, a former British territory that reverted to Chinese control in 1997, have long had such offerings, because they operate independently of Beijing.

Now, Shanghai is eager to establish itself as a financial center that can compete with Hong Kong, and even New York. The city is building a huge financial center in the Pudong district, trying to lure Wall Street executives and giving private equity firms incentives to establish offices here.