Many financial institutions, including securities houses, insurance firms, commercial banks and trust companies, may join the annual race for a piece of the bond-issue pie, expected to be worth about 600 billion yuan (US$72.46 billion) this year.

If they qualify, the institutions will be able to underwrite and trade treasury bonds in the inter-bank market, stock markets, or across markets.

The invitation has already been forwarded to the firms concerned, said a senior official with the Ministry of Finance, the issuer of the treasury bonds.

Foreign banks are still prohibited from joining the three planned consortia, said the official, adding that there is no timetable for allowing a foreign presence among these underwriting groups.

"And domestic financial institutions are now allowed to file documents for qualification revisions to join the underwriting syndicates in the stock markets, said the official, who declined to give her name.

She said that name lists will be finalized and released after the Spring Festival in early February following a joint review by the top regulators who oversee the market, including the Ministry of Finance, the central bank and the China Securities Regulatory Commission.

In 2002, a total of 51 companies were given the green light to trade in the inter-bank market, while 50 companies were allowed to trade in the stock markets, among which 12 were allowed to trade in the cross-market.

Different underwriting groups will be launched before a unified bond market is established, despite the authorities efforts to speed up such a move.

Research on the development of a unified market began in 2002, but there is no final timetable as yet, according to Zhang Tong, a senior official with the Treasury Department of the Ministry of Finance.

Insiders say that the size of this year's consortia will be similar to last year's.

The treasury-bond business is billed as one of the most profitable businesses available in the current sagging stock markets, where fierce competitions has already narrowed profit margins for firms that rely on traditional underwriting business.

And the membership in the bond club seems more lucrative today because most of the securities houses are in the red, suffering from a one-and-a-half year downturn on the anemic domestic stock markets, that have been hit by rampant speculation and a loss of confidence among investors.

To generate more returns, some fund companies have already launched bond-oriented open-end fund products to lure investors from the bearish stock markets, where retail investors have been much distressed by the sluggish performance and hope to find products with a lower credit risk but stable returns.

According to guidelines issued by top regulators, candidate firms for the stock-market-tradable, book-entry treasury bonds will include securities houses, insurance firms and trust firms with registered funds of over 800 million yuan (US$96.61 million).

But the top 30 companies as ranked by the Ministry of Finance in 2002 need not comply with the bottom-line qualifications.

Candidate firms with sound operating records, good performances and active trading records in 2002 are also exempt, say the guidelines.

The qualified firms will be divided into two groups, with the top 20 firms in 2002 in group A, which can bid to underwrite up to 30 per cent of the total bonds in each issue.

The remaining firms can only gain smaller contracts of less than 10 per cent of a single issue.

A new bond product, book-entry bonds were first introduced into the market in the mid-1990s as an alternative financial tool to the original certificate saving bonds.

A tradable investment tool, the new tax-free bonds have won hot applause from the market for their high liquidity, higher returns and low risks. They have also proved a hot seller among financial institutions striving to develop intermediate businesses in a move to diversify their income channels from the traditional major source of the interest gap between deposits and loans at the commercial banks.

Since China resumed issuing treasury bonds in 1991, the traditional certificate saving bonds became their major form, but were outperformed by book-entry bonds in late 1990s as the country moved to boost the issuance of treasury bonds in a move to jump-start domestic demand to ward off the possible negative impact of the Asian Financial Crisis.

In 2000, the country issued a total of 465.7 billion yuan (US$56.24 billion) in treasury bonds, among which 41 per cent, or 190 billion yuan (US$22.94 billion), were certificate saving bonds. The majority were tradable book-entry bonds.

And in 2001, tradable bonds accounted for 63 per cent of the bond-issue total of 488.3 billion yuan (US$58.97 billion).

The country is set to issue about the same amount of treasury bonds in 2003 as it did in 2002, said Li Shousheng, director of the Department of Comprehensive Affairs under the State Economic and Trade Commission.

The huge issue is expected to provide plenty of room for the members of the underwriting consortium.

"Judging from past records, candidate firms will be much interested in joining the competition, and qualified institutions stand to make big profits with low risks, said Jia Kang, a renowned financial expert.

(Business Weekly January 28, 2003)