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Treasury bond develops with economy

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

A local newspaper in Shanghai published the news, which was ignored by almost all the readers but Yang who was an exception. The former warehouse keeper in a State-run metallurgical factory in Shanghai quit his job in March that year to look for ways to earn money. He subscribed to 72 newspapers, thumbing through them all the day at home for information. While reading the news about T-bond trading, he believed he saw a golden opportunity.

In early morning of April 21, 1988 the first T-bond trading day, Yang rushed to 101 Xikang Road where the Shanghai trading market was located and where he bought three-year T-bonds.

"In 1988, the interest rate for three-year bank deposits was 5.4 per cent, while that for treasury bonds was 15 percent, why shouldn't I buy?" he recalls in Shanghai Evening News.

Others noted his bold move and it ultimately spurred a buying spree. In the afternoon the price of the T-bonds with a 100-yuan face value surged to 112 yuan and Yang sold his bonds out - earning 800 yuan in just half a day, which was equal to his annual salary in a factory.

But that was not the end of the story. In his newspapers, he found the trading price for the same T-bond in Hefei, Anhui province was far lower than in Shanghai. Savvy Yang immediately took a train to Hefei to buy T-bonds and brought them back to Shanghai to sell. In doing so he became China's first mobile T-bond dealer and continued to shuttle between Shanghai and other cities by train with money earned from the market or borrowed from friends and relatives.

He worked so hard that Shanghai Securities Exchange later found that a quarter of its transaction came from Yang.

"My dream those days was to earn 100,000 yuan," he recalls. But in 1988 alone, he earned half a million. The swelling wallet made him so nervous that he could hardly believe a socialist society would allow people to earn so much money. The Shanghai government also noticed Yang's business and some high-ranking officials ordered an investigation into why an ordinary citizen such as Yang was doing better than State-run securities companies.

Worrying about possible policy changes, Yang offered to pay a tax to ensure his money was protected, but tax officials told him his earnings from both T-bonds and T-bond trading were tax-free.

In 1989, Yang moved to the stock market and finally earned his first 1 million yuan and his nickname has become a legend in China's stock market lore.

Many people followed Yang's example and earned quick money by trading T-bonds. They also took advantage of the rural areas where T-bond trading was unauthorized and where ignorant people had little idea what their T-bonds were worth. Thus some naive bondholders were eager to sell the bonds for less.

But these underground transactions spurred further reform in the bond issuance and trading system. In 1991 all cities of prefecture level were allowed to conduct T-bond trading and the Ministry of Finance no longer resorted to administrative means to issue T-bonds. Financial institutions formed underwriting groups to underwrite the bond issues.

T-Bond futures

With T-bond trading all the rage across the country, the Shanghai Stock Exchange introduced T-bond futures trading to brokerages in 1992 and to the public in October 1993 to offer investors an option to hedge and thus achieve higher benefits. But only a year and half later, the "327 T-bond scandal" led to the collapse of the whole T-bond futures market, bankruptcy of the country's largest brokerage and sent a leading figure in China's stock market to jail.

In this market manipulation case in February 1995, Shanghai International Securities - at the time China's largest brokerage and one that was also internationally well respected - and Liaoning Guofa Group were involved in a scheme to illegally to recoup losses that emerged after poor trading decisions were made.

Prior to the maturity month of 327 T-bonds (three-year-term T-bonds issued in 1992) futures, price manipulators, led by Shanghai International took advantage of short-selling restrictions in the T-bond spot market and very low margin requirements in the T-bond futures market. They accumulated a significant amount of long positions for 327 T-bonds, which they had no intention to offset. It led to 6 billion yuan in losses for the company and the collapse of the T-bond futures market.

Shanghai International was later taken over by Shenyin Securities while Guan Jinsheng, president of Shanghai International and one of the founders of China's stock market, was arrested in May 1993 and sent to prison for 17 years. On May 17, 1993 the securities watchdog, China Securities Regulatory Commission announced suspension of T-bond futures trading.

This incident was later widely compared to the Barings bank scandal which also took place in February 1995. Barings - then the oldest bank in Britain - collapsed after it was unable to meet its cash requirements following unauthorized speculative trading in derivatives at its Singapore office by then-trader Nick Leeson.

Planning and innovation

By the end of 2007, China's aggregated domestic debt balance exceeded five trillion yuan for the first time. The figure was twice that of 2003. In 2007, the country's total transaction volume of T-bonds reached 19 trillion yuan, nearly 50 percent more than in 2003.

Assistant Finance Minister Zhang Tong said earlier this year that T-bonds were a strong support to the economy but added that further innovations were needed.

An issue of special T-bonds last year was such one innovation when for the first time China issued 1.55 trillion yuan of special T-bonds to purchase $200 billion in foreign exchange from the central bank to fund the China Investment Corporate (CIC). The CIC is a State-owned foreign exchange investment firm launched in September 2007 designed to manage the country's huge foreign exchange reserves, which amounted to $1.53 trillion by the end of 2007. The special T-bond issue also helps off siphon excess liquidity from banks and curb China's speeding credit growth.

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