Caixin
Sep 30, 2016 06:53 PM

China's Finance Ministry Mulls Trading in Government Bonds

(Beijing) — China's Ministry of Finance is considering becoming a major new player in government debt securities trading, adding liquidity to a market that often has a dearth of buyers and sellers.

If the contemplated measure is adopted, the ministry would trade existing government bonds in addition to issuing new ones. Market makers could buy or sell government bonds from the Finance Ministry at any time.

A government bond trader told Caixin that such a mechanism has been under discussion for almost a year, and "it is a mature time for this plan now."

Another market player said the bond market in China is highly illiquid. Market makers can barely make a profit from the small difference in the "bid" and "ask" prices, and it is often difficult for them to quickly find a buyer.

According to figure from the Ministry of Finance, China issued 2.1 trillion yuan ($315 billion) of government bonds in 2015.

Public data show that the turnover ratio of Chinese government bonds was 91 percent in 2015, about 20 times lower than the U.S. Treasurys in the same period, according to the U.S. Securities Industry and Financial Markets Association. The turnover ratio refers to the volume of bonds available for trade relative to the total volume of outstanding bonds.

A person at in the fix-income department of a securities firm told Caixin that market makers usually hedge against inventory risk by including them in complex financial instruments that guarantee a payment at a given interest rate, or by seeking a very large buyer. The source said that if the new mechanism is adopted, the Ministry of Finance will act as the major buyer that can remove inventory pressure from the market.

Another securities-firm employee agreed, saying the tool could also inject vitality in the market and increase liquidity.

Contact reporter Dong Tongjian (tongjiandong@caixin.com); editor Ken Howe (kennethhowe@caixin.com)

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