FURTHERING AND IMPROVING THE MARKETIZED ISSUANCE OF FINANCIAL BONDS

by Gao Jian, Vice Governor, the China Development Bank

As a project financing institution directly under government administration, China Development Bank (CDB) has made constant innovations since its establishment a decade ago in terms of product design and issuing modes of financial bonds, thereby contributing substantially to the construction and advancement of China's bond market.

The CDB's active role in promoting the bond market

By issuing financial bonds, the CDB accumulates scattered social capital into large amounts, short-term capital into medium and long-term construction capital. The two-trillion-odd worth of financial bonds that have been issued, which mainly go towards the country's infrastructure, basic industry and pillar industries, have vigorously supported China's "Two Bases and One Support" and key construction projects, driven the development of relevant industries, and promoted capital market growth. Furthermore, the innovative products introduced by the CDB in the bond market have activated trading on the secondary market, thus enhancing the progress of China's bond market. The CDB's successful practice in marketized issuing over the past six years has provided the market with diversified investment instruments, and, more importantly, helped to safeguard and nurture a healthy bond market in China. As for the operation of commercial banks, the CDB's financial bonds have offered products for financial institutions to improve their asset structure and raised commercial banks' bond-investing ratio, facilitating their ability to adjust asset structure, optimize asset quality, and maintain sound operation.

Win-win in bond issuance

By strengthening marketing and sales and product innovation, with the support of its underwriters, the CDB has fulfilled its issuing goal for 2004. In 2004, the CDB issued 335 billion yuan worth of financial bonds. Included were 40 billion yuan of short-term bonds, and 295 billion yuan of medium and long-term bonds over one year. In an unfavorable climate of rising interest rates in the bond market, shrinking transactions in the secondary market, and flagging investor subscription initiative, the CDB introduced market-favored new varieties of forward bonds and floating-rate bonds with the 7-day repo rate as the benchmark, thus offering tools for investors to avoid or reduce risk from rate movement. Furthermore, the CDB enhanced the marketing and sales for its financial bonds, added new clauses to protect investor interests, and chose the right time to issue its bonds. These measures ensured the successful issuance of CDB's financial bonds with reasonable costs. In addition, the CDB also actively prepared to issue subordinated bonds, and its application to the China Banking Regulatory Commission, People's Bank of China, and Ministry of Finance to issue 40 billion yuan of subordinated bonds has been approved.

Problems and challenges

At present, the problems and challenges faced by the CDB include limitations on the issuing scale of financial bonds, the segregation of the interbank and exchange markets and insufficient liquidity in the secondary bond market. Also, the rating system which has yet to be improved aggravates uncertainty in bond issuance pricing; when the situation in financial institution operation is addressed, and that of the state-owned commercial banks in particular, taxation on investor's purchase of financial bonds may exert increasing influence on the cost of CDB bonds.

Furthering and improving the marketized issuance of financial bonds

The Central Economic Working Conference concluded that China will begin to implement a sound fiscal and monetary policy in 2005. Against such a macro economic background, the 2005 bond market, according to the CDB, will enjoy a stable and favorable environment for development; and the grand total of bond issuance is expected to be equal to the figure of 2004.

In 2005, the CDB will continue its contact and cooperation with relevant parties, in order to further and improve marketized issuing of financial bonds. The following tasks should be focused on: establishing and improving a customer management system, in order to provide investors with more comprehensive services and more competitive products; continuing to better the underwriting syndicate structure for financial bonds, perhaps by allowing foreign banks into the CDB bond underwriting syndicate and raising the ratio of such institutional investors as fund companies; actively enlarging the issuing scale of financial bonds and exploring financing channels; creating a reasonable maturity structure of bonds and keeping a balance among the issuing volume of diversified maturities; and continuing to make innovations in financial bonds and explore schemes for asset securitization.