Relaunch of bond futures trading in sight

Beijing expected to announce restart of market for financial derivative soon, 18 years after billion-yuan scandal brought an end to system

PUBLISHED : Thursday, 17 January, 2013, 12:00am
UPDATED : Thursday, 17 January, 2013, 4:22am


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Beijing is preparing to officially launch government bond futures after a successful simulated-trading experiment, in a move towards liberalising the interest-rate mechanism.

Guo Shuqing, chairman of the China Securities Regulatory Commission, told a forum in Beijing yesterday that the regulator was ready to restart trading of the financial derivative, 18 years after a trading scandal prompted Beijing to halt it.

The chairman did not give a clear date for the official launch but he indicated an official announcement might be on the way.

The Shanghai-based China Financial Futures Exchange launched simulated trading of government bond futures in February last year, a month after Guo announced plans to develop the futures market.

The launch of bond futures could help fund borrowing costs more efficiently and benefit the central government in reforming the interest-rate system, analysts said.

Since Guo became the commission's chairman in late 2011, he has sought to liberalise the futures market in the hope that its expansion can support economic growth as China gains pricing power on commodities and financial products.

Last year the Shanghai Futures Exchange said it planned to launch crude oil futures and was likely to invite foreign investors to trade them.

China's government bonds were valued at 8.07 trillion yuan (HK$9.87 trillion) at the end of last year, up 9 per cent from the previous year.

Bond futures could also help increase liquidity of the bond market.

"They are necessary to develop the bond market," said Gang Meng, a ratings director at Dagong Global Credit Rating.

"Launching the derivative means the government has fully recognised its importance, despite concerns about the risks."

The central bank tightly controls interest rates but plans to gradually let them become more market-driven.

Bond futures can play a vital role in the creation of a market-based interest rate mechanism, aiding borrowing and lending activities.

The regulator was forced to close down the bond futures market on February 23, 1995, after Shanghai Wanguo Securities over-speculated on a bond futures contract.

The government spent more than one billion yuan to cover Wanguo's losses at the time.

Government officials have been since been spooked by fears of similar cases, making them reluctant to put the financial futures market back on the agenda.

Guo, who had earlier been the chairman of China Construction Bank, has been determined to deepen capital market reforms since taking over as head of the securities regulator.

The commission is set to give a green light soon to the first initial public offering by a futures brokerage, as part of its efforts to bolster the growth of futures trading.

Turnover on the mainland's futures market climbed 24.4 per cent to 171 trillion yuan last year.