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China's Treasury Bond Market Should have Greater Liquidity: ExpertChina should issue short-term treasury bills to invigorate its treasury bond market and facilitate the government's deficit spending, economist Dai Yuanchen writes in the Financial News.The Chinese government will continue to implement a positive fiscal policy and issue more treasury bonds this year, but poor liquidity of the treasury bond market is limiting the size of debt issuance, Dai writes in a report commissioned by China National Debt Association. In 1998 and 1999, the government's proactive fiscal policy was very successful in timely reversing the downturn of the Chinese economy. The policy contributed 1.5 and 2.5 percentage points respectively to the gross domestic product (GDP) growth of 7.8 and 7.1 percent in the two years. Since the expansionary fiscal policy calls for issuing more treasury bonds, a developed treasury bond market with high liquidity is necessary, as has been proved in many other countries with matured treasury bond markets, where people have full confidence in the bonds and the government enjoys ample room for debt issuance. Experts believe that such a market is also urgently needed in China. In the 1980s, the Chinese government issued a series of treasury bonds, which carried little risk yet comparatively high returns. However, due to the low efficiency of the bond market, it was very difficult for bond holders to cash in their treasury bonds. At that time, some bond holders had to sell their bonds at very low prices when they urgently needed cash. As a result, the government had to resort to administrative means to distribute its treasury bonds. It was after the practice was changed and a secondary treasury bond market was established that the government had expanded its debt issuing capability. The economist notes that as the central bank has repeatedly cut bank interest rates, low bond yields have made it difficult than before for the government to expand the size of national debt. In view of the fact that the existing treasury bonds are mostly three-year and five-year ones, some experts suggest the government issue treasury bills with three-, six- and nine-month maturities, which have the highest liquidity among treasuries, to attract short-term investments. To invigorate the treasury bond market, experts suggest that inter-bank bond trading should be expanded to account for the largest business volume in the bond market. China started inter- bank bond business in 1997, but it is still limited to a small number of commercial banks, securities companies and insurance companies. The central bank should also play a greater role in the treasury bond market and expand its open-market operations. In 1999 the central bank's open-market operations in treasury bond trading amounted to more than 500 billion yuan, still far from enough to regulate the monetary base, the economist writes. To facilitate the central bank's open-market operations, bond repurchase business has to be developed. The economist suggests that China's top legislature approve a ceiling of at least 500 billion yuan for treasury bill issuance, and that local governments be allowed to sell their own debts to finance their own development projects rather than relying on the national debt.
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