One of China’s leading economists has called for Beijing to unify the country’s currently segregated market for treasury bond futures.
China’s futures sector has posted flourishing growth in recent years, with Beijing pushing for further maturation of the financial system, and the 2018 Government Work Report calling for greater development of the bond and futures markets.
While analysts point to the especially strong growth potential of treasury bond futures, China continues to lack a unified market for these instruments.
China’s market for treasury bond futures remains divided between the interbank market and the exchange market. While banks and other financial institutions can participate in treasury bond futures contracts on the interbank market, many commercial banks are still barred from transactions on exchanges.
Observers say that this market segregation is hindering the maturation of China’s financial system by raising transaction costs, as well as reducing liquidity on the treasury bond futures market and impeding its growth.
Li Daokui (李稻葵), director of the Center for China in the World Economy at the Tsinghua University School of Economics and Management and a member of the Chinese People’s Political Consultative Conference, is one such observer who is calling for unification of the treasury bonds futures market by allowing banks to participate in transactions on exchanges.
“Allowing banks to participate in treasury bond transactions on exchanges will permit improved regulation of treasury bond risk, and heighten the stability of the spot market,” said Li to Securities Daily.
According to Li treasury bond futures can strengthen the willingness of commercial banks to hold treasury bonds, and set a firm foundation for the future growth of the market.
Banks will be able to use futures to manage risk when underwriting treasury bonds, which will facilitate their issuance and cut down on issuance costs.
Financial institutions will also be able to use treasury bond futures to hedge against fluctuations on the spot market, preventing large-scale sell-offs under extreme circumstances, as well as liquidity risk and yield risk from impacting each other.
With respect to market-making, treasury bond futures can be used to hedge inventory risk and stabilise supply and demand on the bond market.
Li Daokui hopes that regulators will engage in the cautious drafting of entry requirements for banks to participate in the treasury bond futures market, taking into consideration the nature of their operations and the scale of their assets, as well as level of experience with derivatives transitions.
Banks that satisfy certain regulatory requirements will be selected for participation in trials of treasury bond futures transactions, which will then be expanded to include a greater number of commercial banks.