China to Start Bond Futures Trading Next Week After 18-Year Halt

China will start trading government bond futures next week, providing investors with a tool to manage risk 18 years after the derivatives were suspended following a probe into alleged market manipulation.

Trading will commence Sept. 6, according to a China Securities Regulatory Commission statement on its website. The daily trading limit for the 3 percent five-year note as the underlying security is set at 2 percent on either side of the previous day’s settlement price, according to the China Financial Futures Exchange on its website.

The contracts will help China achieve the central bank’s goal of liberalizing interest rates and deepen financial markets as Premier Li Keqiang tackles slowing growth. The People’s Bank of China in July removed a floor on borrowing costs previously set at 30 percent below the benchmark, as Li pledged to give market forces a bigger role. Governor Zhou Xiaochuan said Aug. 19 he’s preparing to free up savings rates.

“The futures will function as a basic tool to manage volatility,” said Huang Hai, Beijing-based deputy head of the research department at SDIC CGOG Futures Co., a unit of State Development & Investment Corp. “As China is trying to liberalize interest rates, markets can be more volatile, and such a product is essential for risk management.”

China became Asia’s second-largest government bond market at the end of 2012, with 7.42 trillion yuan ($1.2 trillion) of notes outstanding, according to the CSRC. The nation began treasury futures trading in 1992 and stopped it three years later.

China’s government bond sales were 1.03 trillion yuan in the first seven months this year, following total issuance of 1.61 trillion yuan in 2012, according to data from ChinaBond, the government debt clearing house. Maturities range from 91 days to 50 years.

Bond Yields

The yield on government notes due 2018 climbed 25 basis points this month to 3.91 percent on Aug. 29, ChinaBond data show. The rate touched 3.99 percent on Aug. 20, the highest in almost a year.

“The futures will help improve portfolio management,” Huang said. “It is also a good hedge, given the expectation for interest rates to rise.”

China is opening its bond market to foreign investors through its Qualified Foreign Institutional Investor and Renminbi Qualified Foreign Institutional Investor programs.

QFII allows licensed foreign investment institutions to buy and sell domestic securities. RQFII, which was approved in December 2011, allows the Hong Kong units of Chinese financial companies to raise yuan offshore for investment in domestic capital markets. The authorities expanded the program this March to allow all qualified asset managers incorporated in Hong Kong to participate.

The CFFEX in Shanghai currently only trades CSI 300 Index futures. The exchange is studying short-term interest rate futures, the Securities Times reported on Aug. 26, citing an unidentified person.