PERFECT THE MARKET-MAKER SYSTEM AND STIMULATE THE INTERBANK BOND MARKET

During its development over more than five years, China's interbank bond market has witnessed great advances with over 100 issues of immature bonds, more than RMB 2.5 trillion yuan in outstanding debts, and maturities ranging from six months to thirty years. The interbank bond market has become a vital part of China's money market. However, the secondary interbank bond market is not very brisk with an average daily turnover of less than RMB 6 billion yuan, a figure too small weighted against the RMB 2.5 trillion yuan inventory.

To stimulate the interbank bond market, the central bank has made rewarding efforts. In particular, the authorization in August 2001 of nine commercial banks as two-way quoters has significantly contributed to the boom in the secondary interbank bond market.

Obligations for two-way quoters are as follows: first, the quoted prices should be real; secondly, spreads should be kept within the stipulated bands; thirdly, two-way quoters should commit to maintaining continuous two-way quotation for at least one bond; and fourthly, two-way quoters are supposed to regularly submit to the central bank reports on bond market analysis and on their own trading.

To encourage the nine two-way quoters, the central bank has adopted the following measures: firstly, two-way quoters are endowed with the facility to buy bonds in the primary market; secondly, the central bank supports the two-way quoters's fund and bond financing through open market operations; thirdly, the two-way quotation system is being perfected and technologically supported by the National Interbank Funding Center.

Trading in China's interbank bond market follows an over-the-counter pattern, so the members have to devote a lot of time and energy to counterparts seeking and prices negotiating. Thus the efficiency of the market is undoubtedly decreased. However, market liquidity is improved by the two-way quotation of market-makers. In August 2001, the central bank authorized nine commercial banks to make two-way quotation, which has promoted trading in the secondary interbank bond market. Nevertheless, in view of the two-way quoters' rights and obligations stipulated by the central bank, the current two-way quotation is far from realizing full marketization. Sometimes, quoters have to make quotations unwillingly, and the quotations are unable to adjust with market movements. The two-way quoters' interests are not guaranteed.

To cultivate market-maker in its real sense, the central bank should abandon the administrative measures restricting the development of two-way quoters, so that the two-way quoters will not only activate the secondary market through two-way quotations, but can also make profits and their fame in the interbank bond market.

(by Feng Xilai, Deputy GM,Fund Dept.,CCB)