China will soon allow institutional investors to sell Treasury bonds short to increase the growth of the bond markets, the authorities said Monday.

Starting on May 20th, participants in the Shanghai and Shenzhen stock exchanges and the Shanghai-based interbank bond market will be able to conduct a new T-bond repurchase which makes short-selling possible, according to the new rules.

The move aims to promote the healthy development of China's bond markets, the central People's Bank of China, the China Securities Regulatory Commission and Ministry of Finance said on China's official website for bond issues (www.chinabonds.com.cn).

"It provided a new trading tool," said Wei Qi, an analyst with China Securities. "It will boost trading and make it possible for investors to make a profit when the market goes down."

The absence of financial derivatives has made Chinese bond investors unable to profit from a market downturn, which analysts said tends to amplify price fluctuations.

In the stock market, similarly, there have long been discussions about stock index futures which would enable investors to make a profit when the market falls, but regulatory approval has yet to be granted.

According to the new rules, institutions which sell Treasury bonds need to sign agreements to buy them back on fixed dates and at fixed prices - based on margin requirements or a bond guarantee.

The buyers can sell the bonds in the market and sell back on agreed dates to the other party of the contract with bonds they purchase from other investors, typically at a lower price.

The contracts which allow short-selling must not exceed one year in duration to curb risks.

Wei said the new rules will also increase trading since it allows the bonds in the repurchase agreement to be traded, while the existing repurchase agreements all require the bonds to be frozen before the agreements expire.

The new rules will have a less significant impact on the interbank market as investors there have been, for the past year, conducting transactions that are equal in effect to the new repurchasing agreement, she said.

They will have a stronger impact on the stock exchanges by possibly driving prices there, which are already lower than the interbank market, down further due to different market mechanisms, Wei said.

Outstanding amounts that any single investor agrees to sell back must not surpass 20 percent of the total of a single bond issue and must not exceed 200 percent of the investor's total bond holdings, the new rules said.

(China Daily April 20, 2004)