Trading resumes after 18-year halt to promote capital market development

China relaunched government bond futures trading on Friday after an 18-year hiatus in a bid to promote the development of a multi-level capital market.

Xiao Gang, head of the China Securities Regulatory Commission, said government bond futures constitute a breakthrough for the country's derivatives market, and they're an important stage on Shanghai's road to becoming an international financial center.

The resumption of government bond futures trading will help China develop market-oriented pricing mechanisms in the financial markets, pursue interest-rate liberalization and diversify investors' hedging tools, said Xiao. All these moves will better serve the real economy, he added.

Government bond futures contracts were introduced in 1992 on the Shanghai Stock Exchange, but trading was suspended after just three years.

In 1995, Wanguo Securities, then the nation's largest brokerage, placed 140 billion yuan (about $22.9 billion at current exchange rates) in sell orders for one contract in the final eight minutes of a trading day, which was several times the outstanding amount of bonds at the time.

The exchange invalidated the transaction, and the firm's head, Guan Jinsheng, was sentenced 17 years in jail. Wanguo lost more than 6 billion yuan.

Analysts said trading of five-year government bond futures contracts on the Shanghai-based China Financial Futures Exchange will set a benchmark for the market.

"Government bond futures will expand channels for institutions to hedge against interest-rate volatility, as China gradually liberalizes rates," said Jiang Mingde, chief economist and deputy general manager of Sinolink Futures Co.

The central bank removed some limits on bank lending rates in July, and it has pledged to pursue further liberalization on the deposit-rate side to better allocate capital, although it hasn't revealed a timetable.

The exchange offers three contracts at present: December 2013, March 2014 and June 2014.

The base price for the December 2013 contract was set at 94.168 yuan, the March 2013 contract at 94.188 yuan and the June 2014 contract at 94.218 yuan, according to the CFFEX.

The benchmark contract for December 2013 closed at 94.17 yuan, with trading volume of 34,000 contracts, according to the CFFEX.