Establishing a market where individuals and enterprises can buy bonds and other securities is one way of raising capital for economic construction. The process began with the introduction of financial reforms in 1981 and it looks promising.

On the one hand, the introduction of the production responsibility system has increased the income of enterprises and individuals. creating a marked growth in idle money on the economy. On the other hand, there is a persistent shortage of funds for investment which cannot be remedied simply by borrowing from the banks. So long-term financial markets have opened up.

The proposition was put forward by a group of young economists at a national meeting of the China Financial Association in May 1984 and it aroused widespread interest. In the following two years, bonds and other securities were issued in China's 12 provinces and municipalities. In the latter half of 1986, securities markets opened in Shenyang and Shanghai.

From the beginning, this reform has been under state guidance and control to ensure that the positive purpose of creating investment is served without becoming a hotbed for speculation out of which a "profiteering" class could arise.

The government stipulated that indirect financing (bank loans) must predominate and direct financing should only be auxiliary. First to come were short-term money markets for borrowing and bill discounting services between banks, and foreign exchange lending between enterprises, and only later were long-term securities markets to be set up.

The People's Bank of China, China's central bank, recently declared that in the next five years it would authorize various specialized state banks to issue 10 billion yuan in capital construction securities for key enterprises.

Issues and Exchange

The trial reform began in the more developed cities. On August 5, 1985 China's first stock market came into being in Shenyang, an important industrial centre in northeast China. Following that, similar markets opened in Shanghai, Wuhan, Guangzhou and Chongqing.

All these markets are operated by state banks. The securities issued are usually in two forms - financial bonds and enterprise debentures. The financial bonds are more often than not issued publicly and regularly. Their annual interest rate is 9-10 percent, higher than that for both one-year savings deposits (7.2 percent) and state treasury bonds (8 percent for individuals and 4 percent for corporate holders). The enterprise debentures come in more diverse forms. Their interest rates are lower than those of bank savings deposits, but the holders are usually accorded priority in obtaining goods which are in short supply on the market.

Most enterprises issue debentures to their staff and corporate investors. Only a small number may be put on the market, attracting buyers with colour TV sets and famous-brand bicycles, or offering them with priority in obtaining housing and cooking gas. This exerts a considerable pull on prospective buyers.

The debentures have different face values and their terms range from one year to eight years. Unregistered and carrying no compensation when lost, they can be freely transferred.

In Shenyang, six companies issued ten kinds of debentures, bearing interest 20 percent higher than bank deposits. Of this extra amount about one-tenth was distributed as payments to the holders and the rest used to buy the prizes. According to Luo Zhenghong, deputy general manager of the Shenyang Trust and Investment Corporation, which is the sole agency in charge of issuing bonds and securities, most people buy debentures in the hope of winning the prizes. In general, about 26 out of 100 holders will win a prize, the first prize can be as high as 8,000 yuan (about US$2,150).

The ceremony to pick the prize winners is usually held several weeks after the bonds are issued. In Wuhan, 23-year-old Qiu Chengfan bought four 100-yuan bonds, one of which had a winning number. She won a certificate allowing her to buy state-priced liquefied cooking gas. She said this had greatly improved her standing with her fiance as well as her future parents-in-law. "I intend to buy a few more. They may help me get a new flat, who can tell," she said.