Chinese bond futures cleared for relaunch

Plan for resumption of trading in government financial contracts hailed as key step for giving market forces more say on borrowing costs

PUBLISHED : Thursday, 04 July, 2013, 12:00am
UPDATED : Thursday, 04 July, 2013, 3:48am

Beijing has approved the relaunch of government bond futures after an 18-year hiatus, taking a further step towards liberalising interest-rate mechanisms.

The China Securities Regulatory Commission has received approval from the State Council to resume trading of the new financial contracts, two sources said.

The regulator has yet to decide when trading will begin.

The timing of the approval reflects Beijing's determination to bolster the bond market while letting market forces play a bigger role in determining borrowing costs efficiently.

The move comes despite a cash squeeze on the interbank market that drove interest rates to record highs on June 20.

The CSRC could not be reached for comment yesterday.

"It is a bold move by the central government to launch bond futures now," said a source close to the CSRC. "It had been believed that the recent capital crunch would deter the leadership from giving a nod anytime soon."

Beijing unveiled the plan to relaunch bond trading at the start of last year with simulated trading beginning on the Shanghai-based China Financial Futures Exchange (CFFE) in February 2012.

Bond futures contracts create a new price discovery tool for powerful institutional investors to find reasonable borrowing costs. It is regarded as a major policy aimed at liberalising the mainland's interest-rate system.

Beijing halted trading in 1995 after Shanghai Wanguo Securities hugely over-speculated on a bond futures contract.

The sources said the CSRC and the CFFE were giving priority to risk control in drafting the trading rules for the new contracts.

It is speculated that the CSRC could grant a go-ahead to the CFFE to officially relaunch the contract as early as September.

Beijing's push towards market liberalisation was believed to be a key factor in driving up interest rates on the interbank market. Some smaller banks encountered liquidity problems late last month, prompting them to scramble for cash on the interbank market.

The cash squeeze amid the central government's monetary tightening sparked mounting worries about the country's financial sector.

However, top banking regulators played down the fears about the capital crunch, reiterating that the banking system had ample cash to settle payments.

Gu Weiyong, the chief investment officer at Ucon Investment Management, welcomes the return of bond futures, but added: "It doesn't seem that trading will be active initially if the regulator makes strict rules to ward off risks."