BEIJING/SHANGHAI (Reuters) - China is expected to launch a government bond futures market soon, Guo Shuqing, chairman of the China Securities Regulatory Commission (CSRC), said on Wednesday, as Beijing moves to increase liquidity and aid price discovery in its rapidly developing fixed income markets.
The introduction of a government bond futures market has been expected since the CSRC began simulated trading to test the system in February 2012.
The introduction of bond futures and other hedging derivatives is expected to buttress the development of China’s bond market, which has grown rapidly in recent years but remains underdeveloped in comparison to bond markets in developed economies.
“Bond futures will make the market more effective and bond pricing more accurate,” said Gu Weiyong, chief investment offer at hedge fund Ucom Investment Co.
“It will provide investors with an important risk-hedging tool.”
Bond futures also will play a role in regulatory attempts to liberalize interest rates by providing a wider variety of fundraising channels with a more diverse spread of yields than officially controlled rates available from banks.
“Government bond futures will offer a hedging tool for interest rate risk; with this hedging tool on hand, the PBOC will be able gradually to loosen its tight grip on the interest rate regime,” said a dealer at an Asian bank in Shanghai.
China had 8.07 trillion yuan ($1.30 trillion) worth of government bonds outstanding at the end of 2012, up 9 percent from 2011, data from China’s main bond clearing house showed.
Corporate bond issuance also exploded in China in 2012. According to data from the People’s Bank of China (PBOC), bond issuance hit 2.25 trillion yuan ($362.11 billion) last year, up 65 percent.
Bonds comprised 14.3 percent of Chinese total social financing (TSF) in 2012. Local currency bank loans sank to 52.1 percent, a record low, down from 92 percent 10 years ago.
TSF is a homegrown indicator that China uses to measure the total funds available to the real economy. However, it does not measure government bond issuance.
This is not the first time China has introduced government bond futures, but an earlier attempt to launch a similar market was shut down in the mid-1990’s following a scandal.
Earlier this month the CSRC gave the green light for the launch of the country’s first exchange-traded bond funds, improving access to fixed-income products for China’s retail investors.
The government has not provided a specific timetable for the launch of the market.
($1 = 6.2136 Chinese yuan)
Reporting by Pete Sweeney, Lu Jianxin, Lucy Hornby and Shengnan Zhang; Editing by Jacqueline Wong