The '327' China government bond futures incident

A contract with an unresolved price

In December 1992, the Shanghai Stock Exchange opened proprietary trading in Treasury bond futures. One contract, on a newly issued 3-year Ministry of Finance bond, became known in the market simply by its code: "327". From October 1993, individual investors, not just institutions, could trade it. By the standards of China's young capital markets, it was a huge and liquid product.

The "327" bond was unusual for a bond future because its final redemption value was not fixed at issue. On top of a coupon (reported as 9.5% in most English-language sources, 9.7% in one), the Ministry of Finance would pay an inflation-linked subsidy on redemption, and the size of that subsidy had not yet been announced. With inflation running near 22% in 1994, the market spent the second half of that year arguing about how large the subsidy would be. That single unresolved number was the entire dispute: whoever guessed right on the subsidy would make money on the futures price, and whoever guessed wrong would lose it.

The short, the long, and the announcement

Shanghai Wanguo Securities, chaired by Guan Jinsheng, was short the "327" contract in enormous size, betting the subsidy would stay low. China Economic Development Trust and Investment Corporation, together with allied buyers, was long, betting the government would raise it. On 23 February 1995, the Ministry of Finance announced the final redemption terms, and the subsidy favoured the long side. The contract's price swung sharply higher during the session, from a previous close of 148.21 yuan (per 100 face value) to an afternoon peak of 151.98 yuan, by one detailed secondary account. Wanguo was now facing a loss that reports put anywhere between roughly RMB 1.6 billion and RMB 6 billion; that range, rather than a single number, is what the record supports, because no single regulatory document with an exact figure has surfaced in English.

The dump order

Rather than post more margin or accept the loss, Wanguo used its own trading access in the last few minutes of the session, around 16:22, to push an enormous sell order into the market. Reports of the exact size vary: the widely cited figure is around 10.56 million lots (about RMB 211.2 billion face value), while a separate academic summary gives 7.3 million lots (about RMB 146 billion). Both numbers circulate in secondary sources and neither reconciles with the other, so the honest position is a range rather than a settled figure. Whatever the true size, the order was large enough to force the price down hard, from the 151.98 peak to 147.40 yuan, before the close.

The exchange reverses the trade

The Shanghai Stock Exchange held an emergency meeting that same evening and declared all trades placed in the contract during those final minutes invalid, reinstating an earlier valid price of 151.30 yuan as the official close. In effect, the exchange reversed Wanguo's dump order after the fact, by exchange decree rather than by any pre-agreed rule.

Arrests, a merger, and an 18-year shutdown

The affair was not fixed by a change to position limits or margin rules. On 17 May 1995, the China Securities Regulatory Commission, backed by the State Council, suspended Treasury bond futures trading nationwide, with all positions to be wound down by the end of that month. Guan Jinsheng was arrested two days later, on 19 May 1995, and was sentenced on 3 February 1997 to 17 years in prison, reportedly on charges connected to embezzlement rather than any dedicated market-manipulation statute, since China had no such law at the time. Wanguo itself did not survive: in 1996 it was merged into Shenyin Securities, forming Shenyin Wanguo, and the Wanguo name disappeared. China's government bond futures market then stayed closed for roughly 18 years. Only in September 2013 did the China Financial Futures Exchange (CFFEX) relaunch Treasury bond futures, with a standardised 5-year contract, followed by a 10-year contract in March 2015 and a 2-year contract in August 2018.

A second, separate scandal on the same contract

A contemporaneous 1997 US law review article also describes a separate, earlier episode in February 1994, in which a different broker, Shanghai International Securities, was accused of ignoring exchange trading limits and dumping bond futures on the same "327" contract to escape its own losses, at an estimated cost of about 100 million US dollars. The firm name, the loss figure, and the date do not match the 1995 Wanguo affair. These are best treated as two separate scandals on the same contract, both of which fed into the same 1995 nationwide suspension, rather than one source misdating a single event.

This case sits alongside Lecture 6's material on bond futures, margin, and leverage, and it touches Lecture 2's material on margin and clearing. Three features make it a useful, if extreme, teaching example.

A contract with no fixed fair value

A modern government bond future, like the CFFEX contracts trading today, is written on a standardised notional bond, so its fair value is a matter of interest-rate forecasting. The "327" contract's underlying bond was not like that: its redemption value depended on a government subsidy that had not yet been set. That made the contract's fair value genuinely undetermined until a single announcement, not just uncertain in the way a normal bond future is uncertain.

Margin as the trigger for insolvency

Margin turned a price move into a solvency event. Treasury bond futures at the time required brokers to hold roughly 500 yuan of margin for every 20,000 yuan of contract face value, about 2.5%. That is high leverage even by futures-market standards, and it is the same mechanism Lecture 6 sets out: margin turns market risk into a liquidity and solvency problem. The losing side must find cash, or in Wanguo's case capital, fast, rather than simply accept a smaller position value.

A rulebook with no answer for size-driven manipulation

What broke was not the price move itself but the response to it. Rather than post more margin or close out in an orderly way, Wanguo used its own trading access to push a huge sell order through the market in the final minutes, trying to force the settlement price down and shrink its own loss. That is an attempt at price manipulation to escape a squeeze, not a hedge or an arbitrage trade. The exchange's response, cancelling trades after the fact, shows a market whose rulebook had not anticipated this kind of last-minute, size-driven manipulation, and whose fix was an emergency intervention rather than a pre-set circuit breaker or position limit.

Removal rather than repair

The policy response afterwards is itself a lesson in market design. Rather than patch the specific rule that had been exploited, such as a position limit, margin scaled to position size, or a circuit breaker, the regulator suspended the entire product nationwide for about 18 years. Sometimes the cost of a badly designed market is not a repair but the removal of the instrument until the infrastructure, clearing, margining, position limits, and circuit breakers, can be rebuilt from scratch. When China reintroduced government bond futures in 2013, it did so on a new exchange (CFFEX), with a standardised notional bond rather than a specific cash bond with a disputed subsidy, price limits, and an initial margin requirement set deliberately higher, at 3%, than the roughly 2.5% used in 1995.