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SCMP Reporter

Never since treasury bonds began trading on the mainland's two exchanges in 1990 has the secondary spot market been as neglected by the central government as it is today.

 The country is poised to sell this year the biggest issue of government debt papers since 1991 to kick-start a faltering economy, yet none of the tranches sold so far has been tradeable.

 The National People's Congress originally set the issue size for the entire year at 280.86 billion yuan (about HK$261.34 billion) but this will expand by 100 billion yuan once the parliament ratifies a Ministry of Finance proposal.

 Of the original amount, 187.36 billion was issued as certificate bonds through the state and commercial banks. These are essentially similar to savings vouchers, except they carry interest rates higher than savings deposits.

 Paper worth a further 45 billion yuan was issued to commercial banks.

 All in, 83 per cent of this year's original issue was targeted directly at individuals or banks. The coupon rates and maturities were decided by the Ministry of Finance, a feature of a centrally-planned economy which simply refuses to go away despite vows to introduce more market practices to the bond market.

 Will the remaining 48 billion yuan of the issue be tradeable? Bond traders said there was talk of that early this year, but this has apparently died down.

 Why has Beijing back-pedalled on earlier vows to make the bond market more market-oriented by issuing more tradeable bonds?  One explanation is the volatility of the secondary market, which makes it difficult for the ministry to take yields of tradeable bonds as a reference for new issues.

 Excessive speculation in the secondary market makes pricing of new issues inordinately difficult, rendering the ministry vulnerable to criticism in cases of inappropriate prices.

 So, instead of selling more issues via competitive auctions submitted by underwriters, the ministry has decided to fix the interest rates for bond sales through commercial banks.

 It pays lower underwriting fees to the banks and receives the cash proceeds much faster for investment in the economy.

 This prevents a repeat of the situation in 1996 and last year, when underwriters taking part in competitive bond auctions hoarded the papers meant for retail investors and pocketed the capital gains when the bonds made their debut on the exchanges.

 Yet another reason for not issuing tradeable bonds so far for the public is that banks, sitting on mountains of deposits, need an investment outlet to lighten their interest burden.

 By allowing banks to buy more bonds, the government helps draw a sizeable chunk of savings out of the banking system for productive uses, while paying banks a guaranteed risk-free fixed income.

 Banks are wary about lending to state enterprises, because of risks of default, which will expand their non-performing loans.

 All this means the secondary bond market, with only seven tradeable bonds and no new additions this year, is quickly shrinking.

 Daily turnover now averages 300 million to 400 million yuan, against 10 billion yuan daily in the heady days of 1996.

 Unless more tradeable bonds are issued, the days of the secondary spot market are numbered.



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Bonds

Secondary spot market for treasury bonds fades as debt paper stays out of