The Pacific : Despite Its Crackdown in Commodities, China Favors Trading of Bond Futures : Markets: The debt instruments have become the government’s chief cash crop.

A week after the government announced a sweeping crackdown on futures trading, the young brokers in their red vests are still busy fielding phone calls at the Beijing Commodities Exchange. Occasionally, a group bursts into applause as prices jump again.

Free-market dissidents? Derivative disobedients? Hardly. While trading copper and grain keeps some of the traders busy, it is treasury bond futures that keep the phone lines humming. Even traders who normally deal in agricultural futures have government bond prices glimmering on their trading screens.

And as far as China’s crotchety leaders are concerned, that’s all right.

China’s Cabinet issued a notice last week calling for most of the nation’s futures markets to stop trading and banned brokerages from placing orders on overseas markets.

The gerontocracy has singled out the treasury bond futures market as a necessary evil, however, one it is counting on to stoke public enthusiasm for the $10 billion in bonds China is issuing to its citizens this year to as a way of raising cash without printing it in order to pay its bills.

“The market for treasury bonds, which was quite sluggish last year, has been invigorated by the impressive performance of the futures market,” says You Ke, director of the Ministry of Finance’s state debt department.

It wasn’t until 1992 that China was able to swallow the notion that futures trading was anything other than a sophisticated form of gambling. It now has more than 40 futures exchanges.

A future is a commodity to be sold or delivered to its buyer at a date in the future. While many people trade futures contracts as a way to minimize the risk they incur when buying or selling commodities as part of doing business, others speculate in futures for commodities they never intend to own.

No less than their counterparts in New York, London and Frankfurt, authorities in Beijing are concerned that speculation in futures and other derivatives may be a recipe for financial disaster.

“Lots of central banks and companies around the world have been discussing whether to allow derivatives to be controlled or not. China is also controlling this issue,” said You.

China’s historic fear of inflation has a lot to do with its urge to curb futures trading.

“There is a misconception that futures trading is closely linked to inflation,” says Liu Ruizhong, vice president of the Beijing Commodities Exchange.

Inflation connotes cataclysm to China’s leaders in a way the Federal Reserve or the Bundesbank could never fathom. It was inflation that generated public support for the democracy movement that culminated in the Tian An Men tragedy in 1989.

In May of this year, China’s inflation rate dipped, with retail prices rising 18.9% year-on-year, down from 19.5% in April but still well above the target of less than 10% set by Premier Li Peng in March.

Sugar, steel and coal futures have been banned, as a result, because the government thought prices for those products were rising too much.

And on the floor below the busy Beijing Commodities Exchange, the lights at the Beijing Petroleum Exchange are off and the doors bolted. Last month, Beijing decided speculation on the price of oil was fueling inflation and ordered the exchange closed.

Bonds, however, are the government’s chief cash crop. It has sold more than 90% of the $10 billion in two- and three-year treasury bonds it planned to issue this year. Last year, it issued one-third as much.

Bond futures prices are heading in a favorable direction for the government, having risen 10% to 20% at the Beijing exchange this year. Turnover at its 313 seats hit a healthy $162 million today, almost half of which was in state treasury bond futures contracts.

The bond fad has taken a toll on stock market activity. Shanghai’s benchmark stock index has fallen roughly 50% in the past year, in part because investors were selling stocks in order to buy bonds.