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327 Treasury Bond Incident

Starting on December 28,1992, securities brokers were allowed to conduct proprietary trading in Treasury bond futures at the Shanghai Stock Exchange. As of October 25, 1993, individual buyers and sellers were allowed to participate in Treasury bond futures trading at the Shanghai Stock Exchange. At the same time, the Beijing Mercantile Exchange also began to offer the same trading services, making it the first of all Chinese futures exchanges for Treasury bond futures trading. Shortly after that, the number of Treasury bond futures trading marketplaces increased from 2 to 14 (including 2 stock exchanges, 2 securities trading centers and 10 mercantile exchanges). In 1994, the trading aggregate reached CNY 2.8 trillion in the Chinese Treasury bond futures market.

Then, the "327 incident" occurred. The 327 Treasury bond refers to the three-year bond issued by the Chinese Government in 1992, due in June 1995. Between 1992 and 1994, the Chinese government, facing pressure from high inflation, promised inflation protection to help the issuance of Treasury bonds. Different expectations of inflation rates and inflation compensation rates resulted in a huge difference in bullish and bearish market forecasts on the 327 Treasury bond.

In February 1995, rumors suggested that the Ministry of Finance might pay CNY 148, rather than 132, on the 327 Treasury bond with a par value of CNY 100. Despite the rumors, Wanguo Securities decided to go short. On February 23, 1995, the Ministry of Finance announced that it would pay CNY 148.50 on the 327 Treasury bond at maturity. At that time, Wanguo Securities was holding a large short position on the Bond.

As the market opened on the morning of February 23, buyers bullish about the 327 Treasury bond, led by the China Economic Development Trust and Investment Co., pushed the price from the previous night's closing price of CNY 148.21 to 148.50 by buying 800,000 lots. In the afternoon, the price reached 151.98. When Liaoguo Securities, one of allies of Wanguo Securities, suddenly changed sides and started to buy, the price rose by 3.77. A rise of CNY 1.00 would cost Wanguo Securities more than CNY 1 billion. In the last minutes before the market closed, sellers led by Wanguo Securities started to fight back. They first lowered the price from 151.30 to 150 by selling 500,000 lots. Then, they kept pounding the price with lots of hundreds of thousands, and eventually brought the price down to 148. Finally, they threw a selling bomb and dragged the price down to 147.40 with a massive sales order of 7.3 million lots. (In accordance with the provisions of the Shanghai Stock Exchange, a lot in the Treasury bond futures trading represents the number of contracts of underlying Treasury bonds worth CNY 20,000 in face value. A sales order of 7.3 million lots represents CNY 146 billion, but all of the 327 Treasury bonds issued are only worth CNY 24 billion).

After the market closed that evening, the Shanghai Stock Exchange released an emergency announcement that all 327 Treasury bond transactions after 16:22:13 were deemed invalid. Accordingly, the adjusted Treasury bond futures trading amount was CNY 540 billion, and the closing price of 327 Treasury bond futures was the price of the last valid transaction at CNY 151.30. At that closing price, Wanguo Securities would incur a CNY 6 billion loss. The next day, there was a run on Wanguo Securities. Three months later, the Treasury bond futures market was closed.


As one of the first three Chinese securities firms, Wanguo Securities once played a significant role in promoting the Chinese securities market. From its boom and bust, we can learn the following lessons:

The success of financial products depends on many elements, including favorable external environment, appropriate investor mix, rational investment behavior, and sound regulatory rules and systems. - Firms must be fully aware of the risks of financial derivatives and have an objective understanding of their roles. Effective risk management for financial derivatives requires a risk-management system with sufficient technical support that fits the derivatives trading model. This is the core of risk management in the entire derivatives market. An effective corporate governance structure is essential to corporate risk control. Wanguo Securities adopted a family business style management, under which no one can prevent a wrong decision of the management from being exercised, even though the company had the best management minds and business professionals at that time. If a functional board of directors had discussed and analyzed the consequences of such a rash decision, Wanguo Securities might have succeeded to realize all its goals.

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