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Rise and Fall of the First Financial Futures Market in China: The Case of Chinese Government Bond Futures

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  • Chao Chen
  • Zhong‐guo Zhou

Abstract

This paper studies the rise and fall of the first financial futures market in China. We compare the characteristics in the Chinese Government bond futures market with those in the US T‐bond futures market. They differ in market design and structure, market governance, margin requirements, position limits, delivery process, and the way in which the settlement price is calculated. Furthermore, with a unique dataset, we show that prior to maturities of government bond futures, traders began to accumulate significant amounts of long positions for several selected contracts without the intention to offset, forcing short position holders to either purchase deliverable bonds or offset futures at highly inflated prices, causing higher market volatility and price disequilibrium in both spot and futures markets. Arbitrage opportunity arises and the market eventually collapses. The lessons learned from the suspension of the Chinese Government bond futures market offer an invaluable learning experience.

Suggested Citation

  • Chao Chen & Zhong‐guo Zhou, 2009. "Rise and Fall of the First Financial Futures Market in China: The Case of Chinese Government Bond Futures," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 17(2), pages 110-124, March.
    • Handle: RePEc:bla:chinae:v:17:y:2009:i:2:p:110-124
    DOI: 10.1111/j.1749-124X.2009.01145.x
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    1. Ruan, Qingsong & Zhou, Mi & Yin, Linsen & Lv, Dayong, 2021. "Hedging effectiveness of Chinese Treasury bond futures: New evidence based on nonlinear analysis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 565(C).

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