Hong Kong poised to create Chinese treasury bond futures market

Hong Kong Exchanges and Clearing (HKEX) is expected to relaunch an improved version of Chinese treasury bond futures in Hong Kong, possibly as soon as this year, in an effort to broaden the yuan-denominated financial market and deepen the trading liquidity of the Bond Connect scheme.

The exchange introduced a pilot five-year China Ministry of Finance treasury bond future in April last year. But it’s pricing was seen as non-indicative, with inactive market trading.

Re-establishing a Chinese treasury bond futures market in Hong Kong for the buying and selling of bonds on a specified date in the future will help increase liquidity in Chinese interest rate products, and push the development of yuan internationalisation, said Charles Li Xiaojia, chief executive of HKEX.

Unlike global financial markets that comprise numerous financial derivative tools for hedging risks and speculation, foreign investors are currently limited to Chinese primary, cash instruments such as stocks, bonds, commodities, and currencies.

“Interest rate products ultimately is the big next leap. To get the virtuous cycle [in RMB internationalisation] established, ultimately the issue is about liquidity, products and who the users are going to be,” Li said at a conference last week. “People trade these products because of differing fundamental interest rates, which can drive risk, or return, or the economics of the activities they are undertaking.”

Last July, China kicked off the Bond Connect scheme, a channel allowing foreign investors access to the mainland’s US$9.3 trillion bond market using Hong Kong as a conduit. Over 300 participants have enlisted to the programme but turnover remains modest so far, with average daily turnover at about 3 billion yuan (US$466 million).