Interbank Market Will Include Individual, Corporate Investors

China will allow individual and corporate investors to enter the interbank market through over-the-counter trading later this year, said industry officials.

China also will permit foreign banks and insurance companies to bid for treasury bonds on the primary market, according to a top-ranking government official.

"The moves are part of China's financial restructuring to invigorate the interbank market," said an official with the Shanghai-based Foreign Exchange Trading System, where the interbank bond market is based.

Observers say the initiatives will help the government raise capital through debt issues more easily.

Currently only domestic banks, insurance companies and select foreign financial institutions have access to China's interbank market.

Trading is often sluggish, and bond types and terms are limited, according to some fund managers. Only treasuries and corporate bonds are traded.

Regulators are now asking the nation's "Big Four" banks to begin trading bonds over the counter on a trial basis.

The group is made up of the Bank of China, the Industrial and Commercial Bank of China, the Agricultural Bank of china and the China Construction Bank.

The existing interbank market is like "a house built on air," said an official who works with the organization. Introducing new investors will greatly increase the liquidity of bonds and "lay a solid foundation for the house."

The move for the first time would create "market-makers" in the bond market, he added.

Market-makers are traders who invigorate a sluggish market through buying and selling.

In the other effort to enliven the bond sector, China will allow foreign banks and insurance companies to bid for treasury bonds in the primary market, a top official said.

A timetable for when that might occur hasn't been set. The market opening will be "gradual and selective," Xia Zhihua, deputy director of the State Debt and Finance Department under the Ministry of Finance, told Shanghai Securities News.

Under existing rules, foreign companies are not permitted to underwrite bonds.

Prior to the end of 1996, all bonds were traded on the stock exchanges in Shanghai and Shenzhen.

Rampant speculation and great volatility caused the government to establish a Separate interbank bond market, thus setting up a wall between the banking sector and the stock market.

Bonds trading is now limited to two insulated institutions - the stock exchanges and the interbank bond market.

Officials said that over the long term, China will merge the two markets into a nationwide, highly liquid bond market.