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HK opens China bond futures trade as investors search for upside

[HONG KONG] Chinese government debt futures got off to a slow start in Hong Kong on Monday as offshore investors, trading the world's third's biggest bond market for the first time, grappled with some operational issues and contract limits.

Only six contracts were traded as of midday, suggesting foreigners keen to access the onshore bond market from the financial hub will probably tread cautiously on concerns about stability in China's opaque credit markets.

China re-launched the bond futures market in September 2013, nearly two decades after a multi-billion-yuan trading scandal led to its closure in 1995 and volumes have exploded in recent months.

"Offshore bond futures represent a tool for bond investors to manage their interest rate risk, and for investors - in particular those without access to onshore - to express their views on the onshore bond market," said Frances Cheung, head of rates strategy, Asia ex-Japan at Societe Generale in Hong Kong.

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However, Mr Cheung said the slow start was a result of some constraints such as a position limit of 10 billion yuan (S$2 billion) on net futures contracts.

"We are still studying if we need to open an account in the exchange or do it via other institutions," said a trader at a Chinese bank in Hong Kong.

Unlike its equity or FX market counterparts, bond investors typically use swap contracts to hedge their interest rate risk.

And for those who use futures to manage interest rate risk, Chinese policymakers have recently allowed some large investors access to the onshore market for hedging purposes. This in turn has reduced activity in offshore debt futures.

At US$9.5 trillion in total market size, according to Moody's Investors Service, China's bond market is third-biggest in the world, behind the US and Europe.

Analysts expect volumes to rise only gradually.

Contract sizes for the bond futures will be 500,000 yuan each, with the last trading day for contracts will be the second Friday of the contract month.

While yields of onshore Chinese government debt are higher than what is available in the developed bond markets of the West and on most Asian markets, meagre foreign investor participation has reflected concerns over protracted yuan weakness and difficulty repatriating funds across the border.

In December, China's bond market suffered a punishing selloff amid concerns over a liquidity squeeze and a mounting debt load that had its origins in speculative and unproductive investments.

Last month, some of the world's biggest index compilers such as Citigroup and Bloomberg took the first steps to including Chinese debt in their indexes, while Premier Li Keqiang has said China is considering linking the Hong Kong and the mainland debt markets this year.