n By Susan S. Chang Director General Department of National Treasury Ministry of Finance Taiwan, R.O.C

2 Contents n Ⅰ. Introduction n Ⅱ. The Primary Market: issuing and outstanding amounts n Ⅲ. The Structure of Primary Market n Ⅳ. The Secondary Market n V. Policies and Measures Ⅵ. Future Outlook Ⅶ.Concluding Remarks

3 Ⅰ. Introduction n The Government bonds is a very important instrument to raise funds for government projects and expenditure. The government bond market also plays an key role in strengthening the financial sector. In this regard, many countries have try very hard to develop a sound government bond market. The same is true for ROC government. In last ten years, the Taiwan government bond market grew very fast, and many policies and measures had been taken to improve the market.

4 Ⅱ. The primary market F 1. Historical overview cThe first issuance of the government bonds can be traced to 1949 c4 kinds of bonds were issued  Patriot bond  Short-term Bond  Annual Bond  Construction Bond

5 n Treasury Bonds Sold by the Central Government

6 c Before 1975, a special law should be passed accompanying the annual budget bill to legalize the bond issuance. c In 1975, A permanent law “The Statute for Issuing Central Government Construction Bonds” was promulgated in substitution for the annual law.

7 F 2. The status of government bonds c Issuing amount

8 c Outstanding (amount)

9 cOutstanding (as percentage of GDP)

10 Ⅲ. The structure of primary market (June, 2000) F 1.Maturity

11 F 2. Coupon rates of issuing

12 F 3. Bidder of issuance c Bidding qualification: authorized central government bond primary dealers c The present authorized dealers include:  Banks19  SecuritiesFirms38  Bills Financing Companies13  Investment Trust Companies 3

13 F 4. Holder of government bonds cAuthorized dealers 50~60%  Banks35~45%  Securities firms10~20% Bills Financing companies Investment trust companies cOthers40~50%

14 Ⅳ. The Secondary Market n Before 1990, with good fiscal situation, issuance of government bonds had been very small. The transaction volume of stocks is more than that of government bonds. n After 1990, in order to fund many major infrastructure projects, the issuance of bonds increased sharply. This led to the thriving of the secondary market. From 1992, except 1994, the transaction volume of government bonds surpasses that of stocks.

15 n Bonds & Stocks market trading volume

16 n However, the major bond transaction is on the repurchase basis, outright purchase transaction is few. FY 1998FY 2000 Repurchase Transaction 94%85% Outright Transaction 6%15%

17 n The trading system of the secondary market c1. Organized exchange  Players: securities dealers & brokers  Matching method: computer bidding  Fee: 0.1%~0.05% depending on trading volume  Settlement: T+2

18 c2.OTC  Players: securities dealers,brokers and investors  Trading method: bargain directly with dealers, or through “Equivalent yield matching system” automatically matching.  Fee: free  Settlement: T+3 or T+2

19 n Yield Curve

20 n Bond Trading

21 V. Policies and Measures F 1. Improvement of issuing system cFrom allocation to competitive bidding cFrom price offer to interest rate offer F 2. Increase of variety of bonds cIssuing longer-term bonds  Issued first 10-year bond in Sep 22, 1993  Issued first 15-year bond in Jun 16, 1995  Issued first 20-year bond in Nov 24, 1998

22 cIssuing zero-coupon bond  Using Dutch bidding scheme to issue two trenches of zero-coupon bond in Oct 20, F 3. Providing purchasing channel to minor investors c From Apr.1993, 2% of the issued amount is reserved for minor investors. Directorate General of Posts is commissioned to sell to minor investors, through 141 post offices.

23 F 4. Change to book-entry bonds c In Sep first book-entry bonds was issued successfully, and a settlement bank system is used. Up to June 2000, NT$310 billion book- entry bonds have been issued. The settlement banks also increased from 7 to 14. c Since Jan 15, 1999, The transformation of physical form bonds to book-entry ones has been available. The settlement banks play the role as windows.

24 c The percentage of book-entry to the total outstanding government bonds

25 F 4. Providing more issuing information c Working toward regular issuance c Making announcement on the bond issuing plan in quarter basis

26 F 5. To increase market liquidity cSome surveys showed that  A small amount of a single issuance always led to little transaction in the secondary market for that issuance.  A new issuance with the same maturity as last one often results in low liquidity of the last issuance.

27 cMeasures taken  To set each issuance amount at about NT$30 billion.  To prevent issuing two continuous trenches of bonds with the same maturity.  Introduction of reopening scheme is under consideration.

28 V. Future Outlook F 1. To improve management of government debt F 2. To study the possibility of issuance on regular basis to reduce the negative impact of the irregular issuance on the monetary market.

29 F 3. To make government bonds as a benchmark indicator. c A task force was set up to discuss related issues and to work out possible solution. c Issuing 30-year bond is under study to meet the needs of market and to help constructing yield curves with short, medium, and long-term interest rate.

30 F 4. To attract more participation of minor investors c Two measures will be introduced next month:  The information of government bonds will be available via internet and other media by the stock exchange.  Minor investors can purchase new issuance and trade government bonds in the stock exchange, in addition to post offices.

31 Ⅶ.Concluding Remarks n In the last ten years, with the growing issuance of government bonds, many efforts have been made to improve the primary and secondary markets. These improvements not only facilitate the fund raising of government but also contribute to the sound development of the financial sector in Taiwan. I hope our experience in developing government bond market can provide any value for reference. Through joint effort, I believe, with the help of sound and efficient government bond markets, all countries in the Asia Pacific region can enjoy rapid economic growth and prosperity as before.