CHINA'S bond market faces a critical conflict between the needs of an efficient capital market and the remains of the old centrally planned regime, says the World Bank. The bank said bond coupon rates were set for administratively determined deposit rates, and did not reflect secondary market yields. The government could change relative rates of returns on different securities if it wanted to support one market, or increase appetite just before a government issue of securities. 'In these circumstances, the link between bond market activity and underlying real sector developments, in terms of raising or pricing capital, is constrained,' the bank said. 'The bond market cannot act as an efficient allocation mechanism for capital, or pricing mechanism for risk. Many of the market's features are contradictory,' it said. 'A secondary market in bonds using relatively sophisticated trading technology, futures contracts and repurchase agreements co-exists with interest-rate regulation in the primary market and the money market. 'A system of underwriters and primary dealers has been established, but these entities continue to use a retail distribution system that was used originally for forced placements of bonds.' The World Bank said China's approach to capital market development had been cautious and experimental. 'The problem with this approach is that eventually its internal contradictions will distort capital market development.' China had made progress since 1990 but needed greater liquidity and price unity and had to address constraints on the operation of the money market to provide funding and a reliable short-term benchmark.