But there are other risks involved with the absence of commercial banks and insurance players in the bond futures market. As it stands, the institutions able to trade CGB futures contracts include securities firms and their clients, but other larger domestic institutions such as commercial banks and insurance companies remain on the sidelines. [Their absence] in the bond futures market implies potential risks in the early stage of CGB, says Liu. These include low transaction volume and low liquidity of the futures contract, a risk of a cash-bond squeeze, and pricing dislocation between the cash-bond market and the bond futures market. However, the current arrangement suggests regulators are taking a step-by-step approach in granting access to the bond futures market in order to better manage market risks, says Liu. I expect commercial banks to enter the market at a later stage. Following the election of Li Keqiang as premier of the Peoples Republic of China, the authorities in Beijing have ramped up the path to economic liberalization. As well as the reintroduction of CGB futures, the authorities pulled limits on bank lending rates and increased the investment quota of qualified foreign institutional investors (QFII) to $150 billion from $80 billion in July. However, the government has made little progress towards scrapping limits on deposit rates, one of the most important measures towards economic liberalization, according to some experts. Separately, interdealer broker Tullett Prebon unveiled a new pricing service for Chinese bonds. The service comprises pricing data across the liquid interbank bond market. Instruments covered include government bonds, PBOC bills, corporate commercial paper and medium-term notes. Frank Desmond, managing director at Tullett Prebon Information, says: The rapid growth of the Chinese bond market is driving demand for ever higher standards of transparency and independence. With a value outstanding of Rmb22.6 trillion, it is now one of the largest bond markets in the world. Further growth is expected, particularly in relation to corporate bonds, and as the market evolves access will be enabled by niche, sophisticated data.
Andrew Reeve, head of Asia at Tullett Prebon Information, adds: As the Chinese market opens up and becomes more important to financial organizations the world over, the need for independent pricing and valuation information for government and corporate bonds will only increase. The liberalization of the renminbi and its rise as a potential reserve currency are also likely to drive increased foreign investment in the future.