China on track to reintroduce government bond futures trading

Written by Helen Lin || 06 Mar 2012

On Feb 13, 2012, the government bond futures trading simulation was launched by the China Financial Futures Exchange (CFFE). This is an indication that China is on the track to reintroduce the trading of government bond futures after the central government officially closed it 17 years ago in 1995.

In fact, China first launched government bond future trading in Dec. 1992, but then in 1995, the CSRC halted this market mainly due to a scandal surrounding the trading of the 327 contract. Besides the scandal, the number of bonds issued at that time could not support the large volume of futures trading, and there was insufficient market supervision to sustain a healthy government bond trading market.

In comparison, the situation now is totally different. The government bond balance of 6.3 trillion RMB, representing a steady increase in the volume of bonds issued, and the strong government bond market liquidity both support potential further development of government bond future trading. The CSRC has allowed about 10 institutions to participate in the trading simulation, including commercial banks, securities companies and future companies. Until now, the trading simulation has worked well.

The trading simulation may be a signal from the CSRC that it plans to re-launch the government bond futures, a major financial derivatives instrument. Compared with more developed markets, China’s market now lacks effective interest rate risk management tools, a situation inconsistent with possessing such a large volume of government bonds. The reintroduction of government bond future will allow financial institutions and industrial enterprises to better hedge against interest rate risk. However, when the government will re-launch the government bond futures still remains unknown. Keep in mind, it took 3 years for equity index future to get on the right track after nearly 3 years testing program.

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