Treasury bonds shrug off scandal
FOO CHOY PENG
THE rebound of the Chinese treasury bond futures market within a month of the unfolding of a price-rigging scandal has surprised many.
When the central authorities immediately unveiled strict provisional regulations in the wake of the fraud, which centred on the country's largest brokerage, Shanghai International Securities, many feared the sizzle would be taken out of the market.
The Shanghai stock exchange briefly froze trading, imposed price movement ceilings on intra-day trade, and ordered investors to unwind their positions.
When normal trading resumed some two weeks ago, investors began to move in again, and in the past few days enthusiasm has noticeably strengthened.
Those who shorted the market - selling futures they do not own in the hope of buying them back at lower prices - had their fingers badly burned in the scandal on February 23 and 24.
Cancellation by the exchange of trades done in the closing minutes on February 23 meant that some winners were denied their profits.
Yet many more are undeterred by the high risks of bond futures. Why? First, the amount of cash in the hands of the private investors: based on a newspaper report, China is said to have a million millionaires.
Taking a conservative estimate that each has just a million yuan (about HK$917,000), that works out at a trillion yuan. That kind of hot money must surely have an investment outlet, and what better vehicle than treasury bond futures? One alternative, the property market, has lost its fizz with the clampdown on fixed-asset investment by the central authorities. The stock markets have proved to be too erratic and illiquid, while bank deposits are being hit by inflation.
Although coupon rates of bonds above three years are linked to inflation, the returns are still lower than inflation.
But the value of the bonds has been climbing, and the rise of bond futures has been higher than inflation over the past year.
Until inflation is reined in and a recovery is in sight for the stock markets, bond futures market will be the darling of investors.