China Starts 10-Year Bond Futures Trading as Rate Controls Ease

China will allow trading of 10-year government bond futures, the latest step in a plan to build a market-based yield curve and liberalize interest rates.

The China Financial Futures Exchange will officially list the 10-year contracts on Friday, after allowing trading of five-year sovereign debt futures in September 2013. That followed an 18-year hiatus after an investigation into alleged market manipulation in the late 1990s.

Premier Li Keqiang accelerated a plan to relax controls on interest rates after the Communist Party pledged in 2013 to build “a yield curve that reflects market supply and demand.” People’s Bank of China Governor Zhou Xiaochuan, who said in July 2014 that liberalization of borrowing costs could happen within two years, raised the limit on deposit rates to 130 percent of the central bank's benchmark rate this month from 120 percent.

“The new contracts will play an important role in price discovery,” said Huang Hai, the Beijing-based deputy head of the research department at SDIC CGOG Futures Co., a unit of State Development & Investment Corp. “It will serve as an additional hedging tool, expand available trading strategies, and thereby make trading on the market more active.”

Some 878.5 billion yuan ($142 billion) of five-year futures were traded last year, exchange data show. That compares with 31 trillion yuan of turnover on the interbank spot market, according to figures from the China Central Depository & Clearing Co.

The CFFEX is still waiting for regulatory approval to allow banks to enter the derivatives market, Li Zhongchao, an official in the bourse’s bond department, said at a March 13 forum in Shanghai. It is also considering allowing qualified foreign institutional investors and renminbi QFII to trade the debt futures, he said.

The CFFEX is also running mock trading for three-year sovereign bond futures and contracts that allow investors to bet on the direction of the euro and Australian dollar against the greenback, according to statements from the exchange.

— With assistance by Helen Sun

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