Once failed

In 1992, China launched trading of treasury futures, the first financial futures product in China. The Shanghai Stock Exchange (SHSE), learning from the experience of the United States, opened treasury futures trading in December that year, offering 12 kinds of treasury futures contracts, and only institutional investors were allowed to trade. In October the following year, the SHSE opened treasury futures to individual investors.

In July 1993, the MOF issued an announcement to readjust issuing conditions of treasury bonds. According to the announcement, under the background of a high inflation rate, the government decided to give inflation-adjusted subsidies to some varieties of treasury bonds in accordance with the inflation-adjusted rate formulated by the central bank.

The inflation-adjusted subsidy, which is variable, added uncertainty to the earnings rate of treasury bonds, hence enlarging the space for speculating treasury bond futures. Trading of treasury futures then became increasingly active, with daily transaction volume often reaching 40 billion yuan ($6.41 billion), while the total value of spot treasury bonds in the market was only 105 billion yuan ($16.83 billion).

Cheng says trading of treasury futures at that time was so active that many old traders are delightfully talking about it now.

However, the "327 treasury incident" forced the supervising authority to stop China's treasury futures trading. The number "327" is the code for 92 (3) treasury futures contract, which corresponds to the three-year treasury bonds issued in June 1992 and matured in June 1995. The total issuance value was 24 billion yuan ($3.85 billion).

The nominal interest rate of 92 (3) spot treasury bonds, with a face value of 100 yuan ($16.03), is 9.5 percent. Without calculating interest-adjusted subsidies, the principal and interest would total 128.5 yuan ($20.59) at maturity. On July 1, 1993, the central bank raised the interest rate for three-year time deposits to 12.24 percent, which was 2.74 percentage points higher than the nominal interest rate of 92 (3) spot bonds.

However, in an announcement issued on July 10, 1994, the MOF only stipulated that 92 (3) and other varieties of treasury bonds would enjoy interest-adjusted subsidies, but it didn't mention whether the subsidy for 92 (3) spot bonds would be simultaneously adjusted with the interest rate of savings deposits. Therefore whether the interest rate of 92 (3) spot bonds would be raised became an object of suspense in the market since it would influence the mature value of the bonds. Investors were divided into optimists and pessimists.

On February 23, 1995, the MOF announced the 92 (3) spot bonds would be cashed in at 148.5 yuan ($23.8), therefore pessimistic investors made a wrong judgment. But because of weak supervision from both the government and stock exchanges, pessimistic investors broke through the transaction ceilings and sold a huge amount of 327 futures contract, causing optimistic investors to lose 4 billion yuan ($641.03 million).

At 10 p.m. February 23, the SHSE, after an emergency meeting, announced that all futures transactions after 4:22:13 p.m. that day were invalid. This decision made Wanguo Securities Co. Ltd., a major pessimistic investor, suffer a huge loss of 5.6 billion yuan ($897.44 million), and nearly go bankrupt.

On February 24, SHSE issued a circular on enhancing the supervision of treasury futures. However, this circular didn't eliminate public concerns brought on by the "327 incident." On May 17, the CSRC issued another circular, suspending the nationwide experiment of treasury futures on the basis that China had no basic conditions for carrying out treasury futures trading.

Only after two years and six months, treasury futures came to an end, and China's first financial futures stalled.

Risk control

In the past two years, the Chinese market has weighed whether treasury futures should be relaunched, and the dispute still continues.

Many supporters think that with the launch of margin trading and short selling as well as stock index futures since 2010, the stock market already has effective tools to avoid systematic risks. It is now necessary and feasible for China to resume and develop treasury futures.

Considering the mock trading of treasury futures in the past year, the "327 treasury incident" is unlikely to be repeated. The present mock trading has been better designed in many aspects than the 1992 experiment, and includes restrictions on trading volume, limits on price rises and drops, etc.

However, mock trading participants have found that the soon-to-be-launched treasury futures is really the most "complicated" variety in the domestic futures market. All the commodity futures contracts are traded with real goods. Stock index futures are trading with the CSI 300 Index, which is completed after being changed into cash. However, treasury futures are trading with neither real goods nor cash.

"Although such complicated trading can prevent risks, the complexity will also make some investors retreat," said Guo Dongyi, an analyst with CITIC Securities Futures Co. Ltd.

Guo thinks that when launching treasury futures, the government should consider not only possible risks, but also its influence on other industries. Treasury futures may have a negative impact on the A-share market, and investors and the supervising authority should both pay attention. "Once the treasury futures restarts, it will be inevitable for capital to flow from the A-share market to the treasury futures market, and such flow will be in a large amount," Guo said.

In mock trading, the margin for each lot of treasury futures is 30,000 yuan ($4,808). This means the threshold for treasury futures trading is low compared with the minimum margin of 500,000 yuan ($80,128) for stock index futures trading. In the A-share market, 97 percent of the investors are not qualified for stock index futures trading, but most of them can participate in treasury futures trading. Once any serious event happens or it causes the stock market to crash, the Chinese economy will be seriously damaged.

According to a report made by the China Financial Futures Exchange (CFFEX), the central bank, the China Banking Regulatory Commission and other financial supervising authorities organized a joint supervising organization, and the CFFEX, China Central Depository and Clearing Co. Ltd., China Securities Depository and Clearing Corp. Ltd. as well as China Foreign Exchange Trade System have reached an agreement on information exchange, joint supervision, cross-market custody and settlement business in the future.

"We have the strictest risk control system and measures," the report notes.

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