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Treasury bond develops with economy

By Liu Weiling (China Daily)
Updated: 2008-04-14 10:21

Thirty-five years ago, late Chinese Premier Zhou Enlai announced proudly to the world that China was debt-free.

"We achieved new accomplishment in building socialism We have neither foreign nor internal debts. The price is stable while the market is prosperous," he told the 10th Congress of the Communist Party of China on August 24, 1973. Although this is the only recorded statement regarding China's debt-free status, the central government had actually halted issuing treasury bonds (T-bonds) in 1958.

That explains the surprise and confusion in the country when the central government resumed issuing T-bonds 23 years later in 1981.

Although called "gilt-edged bonds" in international markets, T-bonds were a new concept for almost all Chinese. Few had heard of them while their parents had only vague memories at best of so-called "national construction public bonds" - a kind of government bond floated in the 1950s.

The first T-bond issue amounted to 4 billion yuan ($571.43 million), with a term of five to 10 years. The bonds were non-tradable. State enterprises and institutions purchased half and the remaining was reserved for private individuals.

But because few grasped the bond's concept and value, Beijing resorted to pressuring the government-employed purchasers to do so out of patriotism.

"Who knew what bonds were in those days?" recalls 70-year-old Tang Wenyi, a retired doctor in Suzhou, Jiangsu province. "We bought them because we were told by leaders in our unit that we had to buy T-bonds to support the country's construction and display patriotism. Actually the hospital directly deducted some money five to 10 yuan from our salary every month to buy the bond for us. We simply took it as a kind of donation, believing that the money would never come back to our wallets."

The first issue, although in a small size, marked a significant step in China's fiscal system reform and T-bonds became a major means for the country to raise much-needed capital to speed up economic construction after the 10-year "cultural revolution" (1966-76) that destroyed the country's economic infrastructure.

The T-bond's role was reinforced in 1987 when the State Council decided the Ministry of Finance could no longer overdraw from the Central Bank, and in 1994 when the Ministry of Finance was not allowed to borrow from the central bank to offset its fiscal deficit, which made T-bonds the only way for State finance to cover its deficit.

T-bond issues jumped to 20 billion in 1991, 102.86 billion in 1994, 150 billion in 1995, 460 billion in 2000 and 700 billion in 2005. In 2007 alone, the country issued a total of 2.35 trillion yuan of T-bonds for the first issue of 1.55 trillion yuan of "special T-bonds".

Today, T-bonds, along with security investment funds and stocks, have become favorite investments for residents. Their low risk and a relatively high return make T-bonds attractive to conservative investors, in particular to retirees like Dr Tang.

"Now I have to go to the bank hours before opening time to line up for T-bonds," she complains. "But even doing that can not ensure T-bonds are available when my turn comes. Usually they are sold too quickly."

In Nanjing, capital of Jiangsu province, 100 million yuan worth of T-bonds were sold out within 10 minutes on November 1, 2004, disappointing hundreds of people - mostly retirees or middle aged - who arrived at the banks even before 5 am. Angry investors complained the bonds were sold too quickly while some even suspected that bank employees and/or institutional buyers secretly snatched up much of the limited issue quota at each bank outlet.

Nowadays if you pass a bank outlet with a long line in front of it anywhere in China, no matter big city or small town, don't ask why. The reason is the same - T-bonds.

A millionaire's first pot of gold

Actually the T-bond turning point was in 1988 when Yang Huaiding, a famous Chinese stock investor nicknamed "Millionaire Yang", was among the first batch of people to discover opportunities in the T-bond market.

To reform the issuance of T-bonds, the government conducted an experiment to allow trading of the T-bonds in April 1988 in seven selected cities including Shenyang, Shanghai, Guangzhou, Wuhan, Chongqing, Shenzhen and Harbin. A month later the experiment was expanded to another 54 cities.

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