China will allow qualified securities houses to provide short-term financing in the interbank bond market, offering the fund-thirsty industry a wider financing channel.

The People's Bank of China (PBOC) the central bank released a regulation on short-term financing of securities firms on Monday.

The regulation says that qualified firms will be able to issue short-term bonds that last no longer than 91 days on the interbank market.

The interest rate can be decided by the seller and buyer of the bond and no limits will be set.

The new rules apply a market-oriented financing mechanism to solve the short-term financing problems of securities firms, a central bank spokesman said.

The central bank highlighted the importance of risk control, information disclosure, prices determined by the market and the design of relevant schemes for supervision and implementation.

The new product is also expected to increase interaction between the capital and the monetary markets, the spokesman said.

Statistics on Chinamoney.com.cn, the official website of the Chinese interbank market, indicate that about 80 securities firms are members of the market.

As designated in the new regulation, issuers should have at least one-year membership in the interbank market, with sound internal control and risk management. They also have to be clear of irregularities in information disclosure or client fund applications in the previous year.

The regulation, effective from November 1, is part of the financial authorities' efforts to implement the State Council's policy of enhancing the development of the capital market.

Limited financing channels have become a bottleneck for the country's 130-odd securities houses, with only a few listed domestically and few issuing corporate bonds.

"Allowing securities firms to issue short-term bonds will enhance the financial strength of these firms as well as investor confidence," said Zhu Jianfang, an analyst with China Securities Co.

The new rule is very practical and easy to implement, he said.

Short-term bonds should be more popular than long-term bonds, because they involve more liquidity and less exposure, he said.

Moreover, the interbank market has a diversified membership structure, including banks, insurers, rural credit co-operatives, fund management companies, trust firms and other financial institutions, so the demand and fund supply for such short-term bonds should be sufficient, said Zhu.

Also on Monday, the China Securities Regulatory Commission (CSRC), the securities regulator, released the newly amended regulation on the management of bond issues by securities houses, further lowering the threshold for medium- and long-term bond issues.

For example, the amendment lifted the five-year cap for the term of bonds issued by the securities houses and the requirement of a one-year profit record for the bond issuers.

It also offers the bond issuers more flexibility in the setting of rates and the choice of guarantee agent, and lowers the minimum volume of a single bond issue.

A CSRC spokesman said that the amendment is in response to the proposal of many securities companies to increase the flexibility of the terms and rates of medium- and long-term bond issues.

So far, more than a dozen securities houses have applied to CSRC to issue bonds and five have already obtained approval and started issues.

(China Daily October 20, 2004)