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September 6, 2013

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Government bond futures trading stages comeback

China resumes trading of the long-waited government bond futures today after an 18-year suspension as the government aims to diversify portfolio for investors and proceed with liberalizing interest rates.

The three five-year contracts start trading on the China Financial Futures Exchange with the base price for December 2013 contract at 94.168 yuan (US$15.40),  March 2014 contract at 94.188 yuan, and June 2014 contract at 94.218 yuan.

Analysts said the relaunch of government bond futures is significant but trading is likely to be light as key participants, including commercial banks and insurers, are still excluded. Only qualified brokerages and mutual funds are now allowed to trade bond futures.

But Yu Haixia, researcher at Capital Futures Co, said lenders and insurers will eventually participate in the market as they will help standardize market operation and boost vitality.

The relaunch of the government bond futures came after the People’s Bank of China, the central bank, removed the lower limit on lending rates in July, marking a big step in China’s deepening of market-oriented interest rate reforms.

“Government bond futures provide a tool for managing interest rate risks,” said Zhao Kui, analyst of Huarong Securities.

“Bond futures are expected to become an important reference for pricing of medium and long-term interest rates and help accelerate interest rate liberalization,” Zhao said.

The trading of government bond futures was halted in 1995 after Wanguo Securities brought the price down in the last eight minutes of trading by selling massive orders in order to rescue a losing short position. Its move resulted in losses for other traders. 

“The scandal is unlikely to repeat as the market environment has changed with investors getting mature and the regulator has set a range of limits and requirements to curb speculative activity,” Minsheng Securities said in a research report.

December 1992 China launches government bond futures on the Shanghai Stock Exchange to institutional investors only.

October 1993 The exchange allows individual investors to trade government bond futures.

1994/1995 Trading in futures expands to 14 exchanges existed at that time.

February 23, 1995 Wanguo Securities, China’s biggest brokerage at the time, brings the price down in the last eight minutes of trading by selling massive orders to rescue a losing short position, resulting in losses for other traders.

May 17, 1995 The China Securities Regulatory Commission halts trading in government bond futures.

December 2011 The China Financial Futures Exchange says it is preparing to resume government bond futures trading.

February 2012 The CFFEX starts simulative trading in government bond futures.

July 5, 2013 The CSRC says the State Council has given the green light to resume futures trading.

August 30, 2013 The CSRC announces it has approved the CFFEX to restart trading of government bond futures on September 6.

 




 

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