* HK starts China bond futures trade
* First day trading lukewarm
* Volumes seen to rise gradually
(Updates trading activity, fresh comments)
By Saikat Chatterjee and Michelle Chen
HONG KONG, April 10 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.
Foreign investors are expected to slowly embrace the new
access to mainland China's $9.5 trillion bond market, behind
only the United States and Europe in size.
"It will take awhile for investors, especially non-Asian
investors to gain familiarity with the market, trading
behaviour, as well as operational aspects of bond settlement,"
said Desmond Fu, Asian fixed income portfolio manager at Western
Just over 100 contracts for front-month China bond futures
were traded on Monday in Hong Kong, according to
Thomson Reuters data. That is a tiny amount when compared to the
more than 120,000 trades in three-year Korean treasury bond
futures on the same day.
Hong Kong's front-month futures contract on five-year China
bonds was bid at 99.09 and offered at 99.24 as of 5:10
p.m. (0910 GMT), according to Thomson Reuters data.
The slow start was partly a result of trading constraints,
such as a position limit of 10 billion yuan ($1.45 billion) on
net futures contracts, said Frances Cheung, head of rates
strategy, Asia ex-Japan at Societe Generale in Hong Kong.
The contract size for the bond futures is 500,000 yuan
"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.
Offshore bond futures are seen as a tool for investors to
manage their interest rate risk, and to take an indirect
position on China's booming onshore bond market.
Volumes in China's bond futures market has exploded in
recent months. The market was re-launched in September 2013,
nearly two decades after a multi-billion-yuan trading scandal
led to its closure in 1995.
Unlike its equity or FX market counterparts, bond investors
typically use swap contracts to hedge their interest rate risk.
Chinese policymakers have recently allowed some large
investors access to the onshore market for hedging purposes,
which has reduced activity in offshore debt futures.
Foreign investor participation may also be limited by
concerns over the protracted yuan weakness and the difficulty of
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
Last month, some of the world's biggest index compilers,
such as Citigroup and Bloomberg, took the first steps to
include Chinese debt in their indexes, while Premier Li Keqiang
has said China was considering linking the Hong Kong and the
mainland debt markets this year.
($1 = 6.9060 Chinese yuan renminbi)
(Additional reporting by Umesh Desai; Editing by Shri
Navaratnam and Randy Fabi)