The Information Office of Ministry of Finance, June 20, 2006
In order to enrich the variety of treasury bonds, improve the management of obligatory rights for bondholders, enhance the issuing efficiency of T-bonds and offer convenience for the investors, the MOF will issue electronic savings bonds. In recent days the charging officials of MOF and PBC answered questions raised by journalists concerning electronic savings bonds.
Q: Would you please explain what is savings bond? How many types of savings bonds do we have in China?
A: The savings bond is a type of non-circulating bond issued by the government towards the individual investors with the goal of absorbing the individual savings and funds and satisfying the needs of long-term savings investment. Based on the recording forms of obligatory rights, T-bonds can be divided into two types: paper certificate and electronic bond. China’s savings bonds include existing certificate T-bond and electronic savings bond, which will soon be issued. They will co-exist for long time in our country.
Q: What is electronic savings bond? What are its features? How you position this product and what is your vision for it?
A: Electronic savings bond is a type of non-circulating RMB bond issued by MOF toward Chinese citizens with a large amount of savings funds. Its obligatory rights are recorded electronically.
Electronic savings bond has the following features. First, the bond can only be subscribed by Chinese consumers. It is not targeted at institutional investors. To protect the interests of individual investors, especially those small and medium investors, we fix on an upper limit for single-term purchase by a single account and. Second, non-circulating. The real name system will be adopted. The bond cannot be circulated and transferred. Third, the obligatory rights will be recorded electronically. There is a specialized computer system to record and manage the obligatory rights of investors. The investors are exempted from such troubles as keeping the paper certificate of obligatory rights. It is convenient for investors to inquiry their obligatory rights. Fourth, safe and stable returns. Such bond is issued by MOF, who is responsible for repaying principals and interests. The stated interest rate has been confirmed when it is issued and it not subject to change as the market interest rate or savings interest rate changes. This bond is exempted from the interest tax. It is an ideal choice those investors prone to low risks. Fifth, encouraging holding to maturity. A minimum holding time limit is fixed for electronic savings bond. It may only be cashed in advance when the minimum holding time limit matures. A corresponding amount of interest will be deducted and a reasonable amount of processing fees will be charged against bondholders. Sixth, simplified procedures. Without cashing cost, the principal and interest will be transferred directly to investors’ capital account upon maturity. Seventh, multiple interest-paying methods. Paying interest annually is an option for individual investors preferring to maintain principal and withdraw interest.
Electronic savings bond takes advantage of modern IT achievements and embodies the human-centric design philosophy and the spirit of keeping pace with the times. In the coming months, MOF and PBC, based on the development of times and investors’ requirements, will continue to perfect the related systems, expand the pilot scope, introduce new varieties, increase new purchasing channels, improve the service standards and strive to develop electronic savings bonds into one of the most popular investment products for the mass market.
Q: What drives you to issue electronic savings bonds?
A: The certificate T-bond was issued towards rural and urban residents in 1994, which played an important role in raising financial funds, promoting economic development and satisfying investment requirements of common people. It also became one of investment varieties warmly welcomed by common people. Since its issuance 12 years ago, MOF, PBC and other related departments have been making joint efforts to improve the issuance and management system of certificate T-bond and form the comparatively smooth issuance network. It can be purchased at over 80 thousand outlets of 37 members of underwritten syndicate, which may satisfy the demands of urban and rural residents to purchase T-bond nearby their homes. The certificate T-bond adopts the receipt voucher of certificate T-bond of the People’s Republic of China to record the obligatory rights. It is difficult to establish a countrywide and consolidated issuance system. So there is a lack of transparency in the progress of selling certificate T-bond and it is difficult to adjust the issuance amount across different banks and regions. There often occurs a scenario that the investors in some regions cannot find T-bond to purchase while the banks in other regions cannot complete their issuance assignments. When the investor needs to cash the bond, he or she has to go to the outlet. There are no additional interest returns when the bond is overdue. With the increase of T-bonds issuance amount and the progress of computer and network technology, it is becoming urgent to study how to utilize modern and high-tech tools to establish the new system of T-bond issuance for individual investors with more abundant issuance varieties, more scientific management of obligatory rights, more convenient purchasing and cashing and more tangible adjustment. Aiming at the problems mentioned above, MOF, together with PBC, has been studying how to innovate the savings bonds since 2003. By seeking for opinions of related departments and investors, learning mature experiences from foreign countries and taking our national reality into account, we have basically built up an implementation framework of savings bonds. MOF and PBC selected a couple of commercial banks as the pilot banks and issued electronic savings bonds towards Chinese residents. This move is a beneficial innovation of enriching the varieties, improving the management and increasing the issuance efficiency of T-bonds. It is not only conducive to furthest serving and offering convenience for common people but also accords with international common practice.
Q: Through which channels will electronic saving bonds be issued? Will such bonds be issued throughout the whole country?
A: MOF and PBC confirm that Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications, China Merchants Bank and Bank of Beijing have obtained the qualification to sell electronic savings bonds over the counters of their outlet as the agent banks. The above banks have opened outlets and counters with relevant system in place. Agricultural Bank of China and Bank of Communications can sell the bonds only in a small number of branches while the other 5 banks can sell such bond in almost all their branches. More than 60 thousand outlets will issue savings bonds, covering almost all provinces throughout the whole country.
Investors may go to the nearby outlets of the seven banks mentioned above or dial their hotline for details. These are telephone number of their hotline: Industrial and Commercial Bank of China (95588), Agricultural Bank of China (95599), Bank of China (95566), China Construction Bank (95533), Bank of Communications (95559), China Merchants Bank (95555) and Bank of Beijing (96169). Investors also may dial the policy inquiry hotline (010-68081427, 010-68081167) of National Debt Association of China (NDAC) for details.
Local departments of finance and branches of the People’s Bank of China take charge of supervising and managing the issuance of electronic saving bonds in local areas If investors have problems when they purchase savings bonds they can go to local departments of finance and branches of the People’s Bank of China for complaints.
Q: How can investors purchase electronic saving bonds?
A: First you, as an investor, should open or have an individual T-bond custody account in an administering bank. You do not need to open another one if you have opened a book-entry T-bond custody account over the counter of commercial banks. You may open the account with your valid identification at the counters of these seven commercial banks from 20 June 2006. Banks will not charge any account opening and maintaining fees for the individual T-bond custody account for savings bonds. While you open the individual T-bond custody account, you should open a RMB settlement accounts (a debit card account or a demand deposits bankbook) as the capital account for T-bond account to settle and cash principals and interests in the same bank or a designated administering bank.
With the individual T-bond custody account, investors may go to purchase electronic savings bonds at the network outlet of commercial banks where he or she opens the account during the issuing period.
Q: How to hold obligatory rights of electronic savings bonds in custody and how to inquire these rights?
A: A secondary custody system of telephone recheck and inquiry is implemented for the electronic saving bonds. The primary custody means that authorized by MOF and the People’s Bank of China, China Government Securities Depository Trust & Clearing CO. LTD may open the general agent account for an administering bank which records all obligatory rights of T-bonds managed by this administering bank. China Government Securities Depository Trust & Clearing CO. LTD is responsible for authenticity, accuracy, completeness and security of the primary custody account. The secondary custody means that administering bank opens the individual T-bond custody account for investor that specifically records obligatory rights of T-bonds managed by this administering bank. The administering bank is responsible for authenticity, accuracy, completeness and security of the secondary custody account.
After you, as investors, purchase the electronic savings bonds, you may ask the bank clerks to print out the statement at the counter or dial the service number to inquire your obligatory rights. Some Commercial Banks including Industrial and Commercial Bank of China, Bank of China, Bank of Communications and Bank of Beijing may offer the special T-bond account bankbook for investors, which can record and check the obligatory rights. Investors may recheck the remaining balances of the previous day through the T-bond recheck and inquiry system of China Government Securities Depository Trust & Clearing CO. LTD (Tel: 010-66005000), which is available from 0:00 a.m. to 17:00 p.m.
Q: How to cash the undue electronic savings bonds?
A: Electronic savings bonds belong to non-circulating T-bonds. The undue electronic savings bond that fulfills certain conditions can be cashed in advance. The investor may cash the principal and interest of undue electronic savings bonds at the counter of Commercial Bank sat the stated time. If the investor cashes before maturity, he or she should be charged a certain amount of interests and processing fees. Detailed cashing conditions will be published on the issuance bulletin for each term of electronic savings bonds. If the investor wants to cash before maturity, he or she should go to the outlet of commercial banks to complete required procedures with his or her valid identification, individual T-bond custody account and capital account. The cashing business is stopped 15 working days before interest payment day and maturity day. The bank will resume the cashing business after the interest payment day.
If investors’ demand for liquidity is short-term and do not want to accept the deduction of interest before maturity, they may pledge the obligatory right of electronic savings bonds to apply for the short-term pledge loan at the administering bank.
Q: How to pay interest and cash the due electronic savings bonds?
A: Because the obligatory rights of electronic savings bonds is managed by computer system, investors do not need to go to the counters for interest payment and cashing. MOF entrusts commercial banks to directly deposit interest or principals of savings bonds into the capital account designated by investor at interest payment day and maturity day.
Q: What are the differences and similarities between the upcoming electronic savings bonds and the existing certificate T-bonds?
A: their similarities are as follows:
1. They all belong to savings bonds and they are backed by the credit of the central government.
2. The certificate T-bonds and electronic savings bonds with the same term and in the same variety enjoy the same level of returns.
3. They are free of interest taxes.
Their differences are as follows:
1. Different procedures for application and purchase. The investor may directly purchase certificate T-bonds with cash. If they want to purchase electronic savings bonds, they need to open an individual T-bond custody account and designate the corresponding capital account.
2. Different recording forms of obligatory rights. The obligatory right of certificate T-bond is recorded in the form of a “the receipt voucher of certificate T-bond of the People’s Republic of China”, which will be managed by the Commercial Banks and investors. The obligatory right of electronic savings bonds is recorded electronically. The electronic savings bonds adopt the secondary custody system. Electronic savings bonds are centrally managed by the headquarters of administering bank and China Government Securities Depository Trust & Clearing CO.LTD. This may reduce investors’ risks of keeping paper certificates of obligatory rights.
3. Different interest payment methods. The principal and interest if certificate T-bond is paid off one time upon maturity. The electronic savings bond has multiple methods of interest payment. The interest may be paid annually or paid off together with principal.
4. Different cashing methods upon maturity. When the certificate T-bond expires, the investor may cash the bond at the outlet of administering banks. The interests are not added for overdue days. When the electronic savings bond expires, Commercial Banks will automatically transfer the principal and interest into investors’ capital accounts. The interest of principal and interest in capital account will be calculated and paid at the demand deposit rate.
5. Issuing targets. Both Individual and organizations may purchase the certificate T-bond while only individuals are allowed to purchase electronic savings bonds and organizations are forbidden to purchase or hold electronic savings bonds.
6. Different administering organizations. The certificate T-bond may be sold and cashed at outlets of 37 certificate T-bond agent groups composed by commercial banks and the postal savings service organizations across the nation. MOF and PBC confirm that Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications, China Merchants Bank and Bank of Beijing have obtained the qualification to sell electronic savings bonds over the counters of their outlet as the agent banks. They have opened the outlets of commercial banks with corresponding system.
Q: What are the differences between the electronic savings bond and the book-entry T-bond?
A:
1. Different targets. Both individuals and organizations all can purchase the book-entry T-bond. Only individual can electronic purchase the savings bond.
2. Different interest rate formation mechanisms. Members of underwriting group of book-entry T-bond bid for setting the issuance interest rate. The interest rate of electronic savings bonds is confirmed by MOF with reference to the bank deposit interest rate of the same term and based upon market supply and demand.
3. Different circulating and cashing methods. The book-entry T-bond may be circulated in the market. It can be purchased in the secondary market. It can be sold at market price if capitals are needed. The electronic savings bond only can be subscribed during the issuance period. It cannot go into market for circulation. It can be cashed before maturity based on related regulations.
4. Different forecasting degrees of cashing returns. The trading price of book-entry T-bond in the secondary market is decided by market. The market price (net price) before maturity may be higher or lower than the nominal value of issuance. If the selling price is higher than the purchasing price, the seller may not only receive the T-bond interests during holding period but also some additional benefits from price differences. If the selling price is lower than the purchasing one, although the seller receives the T-bond interests during holding period, he or she shall share some losses of price differences. So if investors the circulating book-entry T-bond and sell it before maturity, the returns cannot be predicted. They have to endure price risks as a result of the change of market interest rate. However, certain provisions governing cashing before maturity have been formulated before the electronic savings bond is issued, The interests of investors can be predicted if they cash the bond before maturity. The principal will not be lower than the stated value (excluding the commission fees for cashing before maturity). Investors do not need to burden price risks as a result of the change of market interest rate. So investors prone to investment security and interest stability may choose electronic savings bonds.
Q: Compared to other non-T-bond investment products, what benefits can the electronic savings bonds of issued bring to us?
A:
1. Highest credit rating and best security. The electronic savings bong is a national debt issued by MOF on behalf of our government. It is guaranteed by government’s credit. MOF will pay the principal and interest at maturity. So it enjoys the highest credit rating.
2. Free of interest tax and stable returns. The electronic savings bond enjoys a stable interest rate. The individual income tax is exempted from the interest income. The issuance interest rate is higher than the after-tax interest rate of bank savings deposit at the same term. During the whole deposit period before maturity, the stated value of electronic savings bond remains stable and the investor may receive accrued interests. They do not need to share risks of the fluctuation of price.
3. Easy to purchase and scientific management. The electronic savings bond, which will soon be issued, may be sold at over 60,000 outlets in most provinces, autonomous regions and municipalities across the nation. Urban and rural residents may purchase it at a nearby location. The obligatory rights of savings bonds are recorded by the computer system. Investors may inquire obligatory rights and recheck them through telephone. The management is more scientific and the obligatory right becomes safer.
4. Easy to cash. The electronic savings bond cannot be traded in the market. But it can be cashed before maturity based on related regulations. When investors purchase savings bonds, they receive a powerful financing tool. When they need a small amount of loans, they may pledge the savings bond for pledge loan in the bank where they purchase it.
Q: What is the difference in terms of returns between the electronic savings bond and savings deposit with the same time?
A: Based on regulations, investors need to pay 20% personal income taxes for the interest income obtained from bank deposits. Presently the interest rate of 3-year-term savings deposit is 3.24% and the earnings after-tax interest rate is 2.59%.
For example you deposit 10 thousand yuan for a 3-year term in the bank. 20% interest tax is deducted upon maturity. The depositor may receive 777.6 RMB actual interests. If you purchase the electronic savings bond with fixed interest rate (3.14%, 0.1% lower than the nominal interest rate of savings deposit) for a 3-year term, you may receive 314 yuan of interests per year and receive 942 yuan in total for 3 years, 164.4 yuan higher than deposit interest. If we calculate the repeated investment earnings of T-bond interest, the accumulative interests of the electronic savings bond will be much higher.
