Upon its entry into the World Trade Organization, China agreed to scores of commitments. But opening its local bond market was not one of them.

Despite not being compelled to change, foreign financial institutions are still extremely keen to enter the off-limits market.

And Anita Fung, treasurer and co-head of HSBC's global markets in the Asia-Pacific region, believes if foreign institutions do enter the market, both China and the overseas groups will benefit.

But Fung said entry should not come at the expense of financial stability. The opening up of the market, she believes, should be dealt with cautiously and carefully to retain the necessary balance.

"I am encouraged by the commitment and understanding that the (mainland) regulatory bodies have shown with regards to the importance of the development of the bond market," Fung said.

She said overseas financial institutions could also play a key role in the bond market's development while working in conjunction with regulators.

The Chinese Government is making huge strides for change and is already considering allowing foreign issuers to enter the bond market.

The Asian Development Bank (ADB) is planning to issue renminbi bonds in China. Its proposal is being considered by the appropriate parties.

If approved, the deal will be the bank's fourth public bond issue in local currencies in the region following its issuance in South Korea, China's Hong Kong and Taiwan seven years ago.

Sources also suggest the International Financial Corp is looking to issue renminbi bonds in China.

"Supranational financial institutions, like the ADB and the World Bank, have been very active in local bond markets throughout Asia. And the entry of such institutions, which generally have very high ratings, helps attract other high quality names into the local bond market," Fung said.

In addition to such a benefit, bonds issued by these institutions can help set benchmarks in local markets and make them more market driven.

Fung said the China market offered exciting possibilities for foreign corporations and foreign investors alike. It will help groups broaden their fund raising activities while at the same time allowing individuals new investment opportunities.

However, Fung said it is very important not to open the market too quickly, which could lead to possible negative impacts that would adversely affect domestic issuers and put excessive stress on the renminbi exchange rate.

"Timing will be key," she said. "We must not rush the process."

In the initial stages of development, only groups such as the ADB and the World Bank will be allowed to enter the market and the proceeds from the issues would be used in lending to domestic projects.

With this in mind, the government still understands the necessity to balance the needs of domestic issuers with the foreign institutions wanting to issue locally.

To achieve such stability, the government will have to control the pace of opening the market by using quotas, selecting only high quality issuers and channelling their use of the funds.

"As long as the pace is controlled and a balance is achieved then the domestic bond market will not be adversely affected," Fung said.

She said China could draw on the experiences of other Asian countries and regions, such as Hong Kong and Singapore, which have opened their bond markets.

In a mature bond market, the government should set up a strong government bond benchmark, ensure reasonable turnover in the market, make sure terms of the bond are reasonable and ensure liquidity of the market.

Meanwhile, the introduction of various traders and investors, including institutional, corporate and individuals, can help enhance the depth of the market.

What's more, hedging instruments should be developed to allow investors and issuers to better manage their risks. Effective indices to judge performance of the bonds in the capital market should also be developed.

Fung also believes the development of China's bond market would be positive for the rest of Asia and help stimulate Asia's bond markets as a whole.

(China Daily November 24, 2003)