PROMOTE THE STEADY DEVELOPMENT OF THE NATIONAL INTERBANK BOND MARKET
The market was born in an extremely special historical environment with an unsatisfactory debut. However, the adjustment of monetary and credit policy as well as the implementation of proactive fiscal policy since 1998 have provided a favorable macroeconomic environment for the development of the interbank bond market in China.
Monetary and
credit policies were adjusted; open market operations were promoted vigorously
On January 1, 1998, the People's Bank of China lifted its restrictions on the loan scale of commercial banks. In March of the same year, it cut the legal reserve ratio from 13% to 8% and took corresponding offsetting measures to increase liquidity. Furthermore, it reduced financial institutions' deposit and loan rate three times in 1998 and resumed open market bond operations in May. Together these policies provided a favorable monetary environment for the development of interbank market.
The interbank bond
market gained strength from proactive fiscal policy
One of the important proactive fiscal policy measures carried out since 1998 was the increase in bond issuance. In October 1999, the Ministry of Finance issued government bonds on the interbank market for the first time, which not only raised a lot of funds for the economic construction of the country, but also accelerated the development of the interbank primary and secondary market.
New ways of
issuing policy financial bonds were explored
The way of issuing policy financial bonds before 1998 required the PBC to apportion bonds to commercial banks according to their proportion of newly increased deposits, furthermore the PBC decided the amount and rate of the bonds. In 1998, the PBC stipulated that policy banks must finance by means of market issuance. In September of that year, the China Development Bank issued financial bonds by means of public bidding for the first time, and successively the China Import & Export Bank began its reform in market issuance style.
National interbank bond market developed on the principle of laying equal stress on regulation and development
The scope of
market members has been expanded continuously
In the initial stage of the interbank bond market, it was mainly the 16 commercial banks who participated in the interbank bond market. In order to expand the scope of market members, the PBC released several documents to provide a policy environment for the access of financial institutions and sped up the examination and approval process. In 2000, the PBC introduced the bond settlement agent system. In April 2002, the PBC transformed the examination and approval system to the recording-and-access system. In this way, market members increased rapidly in number and were pooled from all kinds of financial institutions.
OTC transaction of
commercial banks was piloted
On June 3, 2002, the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China and the China Construction Bank began the pilot issuance of the 7-year fixed-rate bond in Beijing, Shanghai and Zhejiang. After their issuance, the bonds would circulate simultaneously on the interbank bond market as well as on the counter of these commercial banks. The opening of OTC transactions in book-entry government bonds symbolized the emergence of a retailing market within the interbank bond market with the following significances:
* Broadens
channels for individuals and institutional investors to participate in the
national interbank bond market
* Provides new
bond varieties for individuals and enterprises
* Establishes
gradually the bond retailing market for individuals and enterprises on the
counter of commercial banks, and thus expands the national interbank bond
market
Issuance of policy financial bonds and government bonds in market style has been enhanced
In 1998, while attempting to pilot market issuance of bonds by policy banks, the PBC enacted systematic statutes for the market issuance of policy financial bonds. In November 1998, the PBC published detailed regulations for the approval, issuance, information release, registration, custody, payment and repayment of policy financial bonds. This led the issuance of policy financial bonds to develop in a healthy direction and set a good example for the market issuance of government bonds.
Laws and
regulations have been improved
Since 1997, the PBC has promulgated a series of regulations, such as the Regulation of Bond Transaction in the Interbank Bond Market, to guarantee the steady development of the interbank bond market.
Bond custody system has been established
The PBC strengthened the establishment and administration of the bond custody system as well as upgraded the bond trading and issuing system. Together, these movements have enhanced the market's ability to avert risks, raised its functioning efficiency and laid an essential technical foundation for the future development of the bond market.
The PBC carried out bond net price transactions, permitted qualified commercial banks to develop two-way quotations and is trying to establish a market maker system
In order to guarantee the liquidity of the market, the PBC encouraged financial institutions to carry out two-way quotations of bonds, and in July 2001 authorized nine commercial banks, including the Industrial and Commercial Bank of China, as two-way quoters. Meanwhile, it carried out bond net price transactions, which enabled price formation and variations in government bonds to reflect the inherent value of those bonds as well as the variation trend of supply-demand and market rate.
The interbank bond market has made great achievements in its development over the past five years. However, as it draws increasing attention from people of all walks of life and especially the authorities, it becomes obvious that there is still a long way for the interbank bond market to go.
(by Zhou Rongfang, Chief, Market Division, Monetary Policy Dept., PBOC)