Treasury-bond futures relaunch 'smooth'

Trading resumes after 18-year halt to promote capital market development

China relaunched government bond futures trading on Friday after an 18-year hiatus in a bid to promote the development of a multi-level capital market.

Xiao Gang, head of the China Securities Regulatory Commission, said government bond futures constitute a breakthrough for the country's derivatives market, and they're an important stage on Shanghai's road to becoming an international financial center.

The resumption of government bond futures trading will help China develop market-oriented pricing mechanisms in the financial markets, pursue interest-rate liberalization and diversify investors' hedging tools, said Xiao. All these moves will better serve the real economy, he added.

Government bond futures contracts were introduced in 1992 on the Shanghai Stock Exchange, but trading was suspended after just three years.

In 1995, Wanguo Securities, then the nation's largest brokerage, placed 140 billion yuan (about $22.9 billion at current exchange rates) in sell orders for one contract in the final eight minutes of a trading day, which was several times the outstanding amount of bonds at the time.

The exchange invalidated the transaction, and the firm's head, Guan Jinsheng, was sentenced 17 years in jail. Wanguo lost more than 6 billion yuan.

Analysts said trading of five-year government bond futures contracts on the Shanghai-based China Financial Futures Exchange will set a benchmark for the market.

"Government bond futures will expand channels for institutions to hedge against interest-rate volatility, as China gradually liberalizes rates," said Jiang Mingde, chief economist and deputy general manager of Sinolink Futures Co.

The central bank removed some limits on bank lending rates in July, and it has pledged to pursue further liberalization on the deposit-rate side to better allocate capital, although it hasn't revealed a timetable.

The exchange offers three contracts at present: December 2013, March 2014 and June 2014.

The base price for the December 2013 contract was set at 94.168 yuan, the March 2013 contract at 94.188 yuan and the June 2014 contract at 94.218 yuan, according to the CFFEX.

The benchmark contract for December 2013 closed at 94.17 yuan, with trading volume of 34,000 contracts, according to the CFFEX.

Jiang said simulated trading in recent months had shown that investors are keen to be involved in the market.

Trading during the simulated trials was healthy and stable, Jiang said, and the debut of actual trading on Friday was also stable and healthy.

Trading of government bond futures will further help interest-rate liberalization and benefit China's financial markets in the long run, said Wang Wei, a researcher at the CFFEX, who was a director of the team that developed the bond futures.

The team that developed the contract paid great importance to risk controls, said Wang.

Improved risk controls for this new product will not allow any "abnormal" trading - such as the huge buy orders from Everbright Securities last month, said a spokesman at the CSRC on Friday.

"The China Financial Futures Exchange has taken measures to establish and supervise the futures margin system, and any transaction must have enough capital in the margin account" to ensure the trade will be completed, he said.

The new bond futures are mainly aimed at domestic financial institutions. Trading requires a minimum of 500,000 yuan in an investor's account. Foreign investors can't take part in the market directly, under CFFEX regulations.

The relaunch of bond futures contracts won't drain liquidity from the stock market, as the two markets focus on different investor categories.

"While retail investors are the major participants in the stock market, institutional investors dominate government bond futures trading. The debut of government bond futures had no obvious impact on Friday's stock market performance," said Gui Haoming, chief analyst of Shenyin Wanguo Securities Co.

Commercial banks are the largest holders of treasury bonds. As of the end of July, commercial banks held 5.146 trillion yuan in the bonds, or 68.9 percent of outstanding issues.

Commercial banks aren't allowed to trade treasury bond futures, under CFFEX regulations.

Chen Jia in Beijing contributed to this story.