China to relaunch govt bond futures

After an 18-year hiatus, China will soon reinstitute trading of government bond futures, the China Securities Journal (CSJ) reported Wednesday, citing insiders familiar with the matter.

The reintroduction of government bond futures has been approved by the State Council, China's cabinet, and now it is up to the China Securities Regulatory Commission (CSRC) to set an exact date for their return, which could be as early as September, according to the CSJ. This news was confirmed Wednesday by other official newspapers, including Shanghai Securities News and Securities Times.

The impending return of these derivatives had been hinted at recently by top financial authorities. In late May, the vice chairman of the CSRC, Jiang Yang, said the commission was working toward the resumption of government debt futures trading within this year. Last weekend also saw Zhang Shenfeng, chairman of the China Financial Futures Exchange (CFFE), say the time to roll out such contracts had arrived.

Regulators banned the trading of government bond futures in 1995, just three years after their introduction, due to a speculation scandal. In February 2012 though, the CFFE started simulated trading of these contracts, a move which sparked expectations that real trading could follow at a later date.

Regulators are keen to bring government bond futures back this year mainly because the market needs tools to hedge against the risks emerging with interest rate liberalization, Huang Shu, chief macroeconomics analyst at Xinhu Futures, told the Global Times.

"The central bank's recent refusal to pump liquidity into the interbank market even as benchmark money rates hit multi-year highs illustrates regulators' intentions to put interest rates under market forces," Huang said, adding "hedging tools are prerequisites for liberalized interest rate."

Huang also remarked that the scope of the spot market for government debt as well as the preparations made by investors will support trading of government bond futures.

China currently has over 7 trillion yuan ($1.14 trillion) worth of outstanding government bonds, which provides abundant liquidity, according to Zhang from the CFFE. As the Securities Times wrote, the country's pilot trading scheme has been running smoothly for over a year, and about 80 participating institutional investors had conducted a total of 10.82 trillion yuan in simulated transactions by the end of first quarter.