April 7, 2017 / 5:45 AM / in 4 months

PREVIEW-China bond futures trade to open in Hong Kong on Monday

HONG KONG, April 7 (Reuters) - Trading of Chinese government debt futures will start in Hong Kong on Monday as officials on both sides of the border work to boost investor participation in the world's third biggest bond market.

Contract sizes for the bond futures will be 500,000 yuan ($72,457) each, with the last trading day for contracts will be the second Friday of the contract month.

The Hong Kong Stock Exchange will offer futures trading on five-year Treasury bonds issued by China's Ministry of Finance, though market watchers say much of the contract's early interest will depend on market views of China's renminbi.

"The listing of Chinese government bond futures will be a boost to both the offshore yuan bond market and Hong Kong's futures market," said Liao Qun, China chief economist, Citic Bank International.

"But the response among investors may be mixed, given the different views of whether and by how much the yuan will depreciate this year."

The yuan slumped 6.5 percent against the dollar last year.

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.

For example, less than 2 percent of mainland China's government bonds are owned by global investors versus about a third for Indonesia government debt.

A JP Morgan index measuring total returns including coupon payments, currency performance and yields for Chinese government debt has underperformed India and Indonesia's debt over the last year.

Still, officials hope that 2017 will be a watershed year for foreign investors in the Chinese bond market.

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.

Investor demand for Chinese bonds is only set to grow in the coming months because of its size and the increasing importance of China in the global economy, said Thomas Kwan, CIO and head of fixed income at Harvest Global Investments.

At $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 U.S. and Europe.

For the Hong Kong stock exchange, the introduction of the bond futures contract offers an alternative revenue stream as it seeks to diversify its revenues from volatile stock trading.

However, futures trading of onshore Chinese assets such as stocks and currencies has had a mixed run in Hong Kong so far, with currency futures trading in the renminbi rather tepid, barring the occasional spike around market-sensitive events. ($1 = 6.9006 Chinese yuan renminbi)

Reporting by Saikat Chatterjee and Michelle Chen; Editing by Eric Meijer

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