Banking & Finance

Back to the futures

Bond futures are coming back

Back to the futures

After an 18-year suspension, bond futures are back on the menu for Chinese investors. But for those with long memories this could be a mixed blessing – given when they were last around they triggered the largest scandal to rock the country’s capital markets.

The securities regulator announced last week that the State Council had approved a proposal to allow the issue of government bond futures, reports the Financial Times. Trading is expected to start in about two months. It could be an important development, as it will allow investors to hedge against volatility – something that looks more likely if the government continues to relax controls on interest rates.

It will also be a significant expansion for the China Financial Futures Exchange, which currently only has one product, CSI 300 index futures.

But the reintroduction of bond futures has been worrying those who recall what became known at the ”327 incident” – a 1995 scandal, named after a government bond futures contract.

It came about as traders took large short positions on 327 contracts, betting that the price would fall despite government subsidies in the market. China’s then largest securities firm Shenyin Wanguo ran into trouble when it placed a huge sell order on futures with a face value of Rmb200 billion ($32.6 billion), even though there were only Rmb40 billion of government bonds outstanding, reports the FT.

It turned out that the order was not backed by sufficient cash. Shenyin’s CEO was jailed and the president of the Shanghai exchange was fired. Bond futures were suspended.

Are the capital markets mature enough to ensure that history does not repeat itself? Some think not. “Another Great Leap Forward without proper and basic market infrastructure. Another epic stumble is inevitable,” said one Sina Weibo user.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.