REPORT ON THE INTERBANK LENDING AND BOND SYSTEM IN THE FIRST HALF OF 2004

Turnover shrank greatly and interest rates moved widely

In the 123 trading days of the first half of 2004, the national interbank lending and bond market concluded 33,397 deals, down 18.49 year-on-year. The volume traded reached 6.7363 trillion yuan and the average daily turnover was 54.767 billion yuan, down 6.55 percent year-on-year and nearly 30 percent as compared with the second half of 2003. Adjusted for the factor of the Spring Festival, fund supply turned from loose to tight, market rates went up from one year earlier, and the bond composite index fluctuated widely.

The lending rate fluctuated slightly and turnover fell considerably

In the first half of 2004, 4,337 deals of lending were concluded, with a turnover of 815.429 billion yuan, decreasing 25.89 percent from the same period last year, and down 35.21 percent from the second half of 2003. The market lending rate started the year at 2.27, climbing to 3.48 due to the Spring Festival, and then easing to a low of 1.93 on April 9. Affected by the tightening monetary policy and anticipation of an interest rate lift, the lending rate rebounded to 2.41 at the end of June.

In terms of lending maturities, turnover decreased for all terms below one-month in the first half of the year. The turnover for 14-day and one-day dropped by 64.19 percent and 51.21 percent respectively, compared with the second half of 2003. Among the long terms, two-month and four-month both increased in terms of deals and trading volume. Their trading volumes went up by 47.91 percent and 56.43 percent from the second half of 2003 respectively. Except for the continual rise of weighted rates for 21-day and three-month, the weighted interest rates for all maturities increased year-on-year while decreased as compared with the second half of 2003.

Turnover of long-term bond repo rallied and the interest rate rose after dropping

In the first six months of 2004, 18,825 deals of bond repo were sealed on the interbank market with a trading value of 4.6987 trillion yuan, losing 6.08 percent year-on-year. Included were 2.3294 trillion yuan worth of T-bond repo, 2.0628 trillion yuan of financial bond repo and 243.322 billion yuan of central bank paper repo. The interest rate for repo followed a sharp inverted V-shaped path around the Spring Festival. During the second quarter of 2004, the weighted interest rate bottomed up in mid-April, influenced by tightening monetary policies of the central bank and the anticipation of a rate increase. After steadily dropping, the market rate climbed up again and remained stable at a high level amid the tight fund supply caused by the central bank's strengthened withdrawal of money in May and the larger bond issuance in the primary market in June.

In terms of repo maturities, the concluded deals and traded volume stepped up strongly for terms over one month. Six-month and one-month went up by 318.89 percent and 125.39 percent respectively as compared with the second half of 2003. And the nine-month and one-year varieties were traded, of which there was no trading record for 2003. On the other side of the spectrum, deals and turnovers both dipped for short terms below 14 days. The trading volume of the three short-terms accounted for 91.23 percent of the grand total in the first half of year, while the figure was 93.70 percent for last year. In terms of interest rates, the rates for all the maturities went up year-on-year except the slight decline for one-day, while all the rates fell compared with that of the second half of 2003.

Outright repo transactions turned active and the interest rate stabilized after fluctuation

Since its launch in the interbank bond market on May 20, outright repo concluded 99 deals with a turnover of 10.990 billion yuan. The average daily turnover was 440 million yuan and that for June was 474 billion yuan. The interest rate for outright repo tossed upward from the 2.16 on May 20, and stabilized at 2.45 in the last ten days of June.

As of the end of June, 51 varieties were traded, including 17 T-bonds, 28 financial bonds, five central bank papers and one corporate bond. The most active traded three varieties were all cross-market T-bonds (10 trades for 03GB11, eight for 03GB01, and seven for 02GB15), indicating that liquidity is the key to active trading of outright repo. In light of maturities, the most active varieties were 7-day and 14-day, their turnover accounting for 58.86 percent and 13.87 percent of the total trading volume in the market respectively.

Cash bond trading declined gradually and the composite index fell

In the first half of 2004 the cash bond market sealed 10,109 deals valued at 1.2112 trillion yuan. The average daily volume stood at 9.847 billion yuan, up 18.42 percent year-on-year and down nearly 40 percent from the second half of 2003. Deals concluded continued to decrease, down 10.54 percent and 15.89 percent from the first and second half of 2003 respectively. Amid strong market expectation of a rate increase, the cash bond market moved wldely in the second quarter, though milder than the exchange T-bond market. The composite index for the interbank bond market edged up from the year-opening 1149.95 to a high of 1158.61. In the second quarter the turnover shrank in general except for the newly listed bonds. The composite index fluctuated and fell in the second quarter, with a high of 1157.96 and a low of 1146.67.

Institutional financing

The general financing structure remained the same in the first half of this year, although the lending and borrowing involving banking financial institutions shrank to differing extents, while that of non-banking institutions increased significantly. City commercial banks remained the top borrower and net borrower with their net borrowing 79.58 percent less than the same period of last year. Joint-stock commercial banks ranked second, with their borrowing down 24.08 percent year-on-year. In the aspect of lending, state-owned commercial banks topped the lenders, accounting for 45.37 percent of the total lending. Joint-stock commercial banks ranked next, although their net lending size was half that of the second half of last year.