Warrants issued by steel heavyweight Baosteel as compensation to its public shareholders staged a smart rally within the permitted fluctuation range on their trading debut yesterday.

The warrants were priced at 68.8 cents (8.5 US cents) apiece but opened at a premium of 1.26 yuan (16 US cents) - the maximum permitted fluctuation. About 139 million warrants were traded yesterday.

Baosteel offered 387.7 million warrants to tradable shareholders to float its non-tradable State shares. The warrants entitle the holders to buy the company's shares at 4.5 yuan (56 US cents) each on August 30 next year if the share price increases.

Each tradable shareholder of Baosteel got one warrant for every 10 shares but fund managers own about 44.5 percent of the company's tradable shares, which means the same percentage of warrants are also held by funds.

Fund managers also own 45.5 percent of the tradable shares of China Yangtze Power, another listed company to issue warrants.

Last week, market watchdog China Securities Regulatory Commission (CSRC) announced that funds managers can not only hold and sell warrants, but also can buy them on the market. The new rule widened fund companies' business scope, which formerly encompassed securities and bonds.

But fund managers might not be enthusiastic about investing in the new financial product, said Huang Jian, a Shenzhen-based fund manager.

Although the CSRC allows fund companies to invest in warrants, they have to submit a detailed investment scheme to the regulator before entering the market.

Neither do brokers have a great interest in investing in warrants at the moment, said Liu Haobo, a senior analyst at CITIC Securities.

Baosteel's warrants were priced too high, about 15 percent of its share price on Friday, he said.

Moreover, the warrant types are not adequate, Liu said.

Only call warrants have been issued, which represents a specific number of shares that can be purchased from the issuer at a specific price lower than the market price.

Another type of warrant, a put warrant, should also be issued, he said. A put warrant represents a certain amount of equity that can be sold back to the issuer at a specified price higher than the market price.

Meanwhile, warrants are a financial tool with high risks, he said.

Because the prices of warrants are low, the leverage and gearing they offer is high. This means that there is a potential for larger capital gains and losses.

While it is common for both a share price and a warrant price to move in parallel, the percentage gain (or loss) will be significantly varied because of the initial difference in price. Warrants generally exaggerate share price movements in terms of percentage change.

Although the regulator set a price fluctuation range for warrants, the limits can still be large.

For instance, the warrant price of Baosteel can swing between one-eighth lower and one-eighth higher of its closing stock price in the previous trading day.

In time, the main traders of warrants would be small individual investors, Liu said but added that they know little about the product and lack investment skills, he added.