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 the 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, with a term of 5 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 pressing 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 ten yuan -- from our salary every month to buy the bonds 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 (1966-1976) 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 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 relatively high returns make themselves attractive to conservative investors, in particular to retirees like Dr. Tang.

"Now I have to go to the bank hours before the 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 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 reasons are the same -- T-bonds.

A Millionaire's First Pot of Gold

Actually the T-bonds' 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-bonds market.

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

A local newspaper in Shanghai published the news, which was ignored by almost all the readers but Yang. 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.

On the early morning of April 21, 1988, the first T-bond trading day, Yang rushed to No. 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 flourishing 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 a half later, the "327 T-bond scandal" led to the collapse of the whole T-bond futures market and the 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, the Shanghai International Securities -- at that time China's largest brokerage and one that was also internationally well respected -- and Liaoning Guofa Group were involved in a scheme to illegally recoup losses that emerged after poor trading decisions were made.

Prior to the maturity month of 327 T-bond (three-year-term T-bonds issued in 1992) futures, price manipulators, led by the 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.

The Shanghai International was later taken over by Shenyin Securities while Guan Jinsheng, president of the Shanghai International and one of the founders of China's stock market, was arrested in May 1995 and sent to prison for 17 years. On May 17, 1995, 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 the then-trader Nick Leeson.

Planning and Innovation

By the end of 2007, China's aggregated domestic debt balance had 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 an innovation when for the first time China issued 1.55 trillion yuan of special T-bonds to purchase $200 billion 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 and 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 siphon off excess liquidity from banks and curb China's speeding credit growth.

By LIU WEILING