By Susan S. ChangDirector General

Department of National TreasuryMinistry of Finance

Taiwan, R.O.C

2

Contents Ⅰ . Introduction Ⅱ . The Primary Market: issuing and

outstanding amounts Ⅲ . The Structure of Primary Market Ⅳ . The Secondary Market V. Policies and Measures Ⅵ. Future Outlook Ⅶ.Concluding Remarks

3

Ⅰ . Introduction 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

1. Historical overviewThe first issuance of the government bonds

can be traced to 19494 kinds of bonds were issued

Patriot bondShort-term Bond Annual BondConstruction Bond

5

Treasury Bonds Sold by the Central Government

Kinds

Items

Patriot Bond Short-term

Bond

Annual Bond Construction Bond

Issuing

year

1949,

1966-1968

1959 to 1962 1963 to 1975 1975 to present

Purposes National needs Short-term

needs

Annual

Budget

needs

Funding Infrastructure

construction

Solicitation By assignment Quota Quota 1. Quota system

1975 ~ 1991

2. Tendering

Nov. 1991 ~ now

Coupon

rate

Stipulated by

law

Stipulated by

law

Stipulated by

law

Based on market rates

Price Par value Par value Par value 1. Par value 1975 ~ 1991

2. Tendering

Nov. 1991 ~ now

6

Before 1975, a special law should be

passed accompanying the annual budget

bill to legalize the bond issuance. In 1975, A permanent law “The Statute

for Issuing Central Government Construction Bonds” was promulgated in substitution for the annual law.

7

2. The status of government bonds

Issuing amount

0

50

100

150

200

250

300

350

400

450

1949 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

NT$100Billion

Year

8

Outstanding (amount)

0

200

400

600

800

1000

1200

1400

1949 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

NT$100Billion

Year

9

Outstanding (as percentage of GDP)

5.28% 5.01%

10.31%

13.95%13.32%

15.23%14.38% 14.57%

12.96%

11.50%

12.98%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

1949 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

NT$100Billion

Year

10

Ⅲ. The structure of primary market(June, 2000)

1.Maturity

15 years

355bil

19.90%

10 years

440bil

24.66%

7 years

483bil

27.07%

5 years

220bil

12.33%

under 5 years

220bil

6.17%

20 years

176bil

9.87%

11

2. Coupon rates of issuing

5.00%

5.50%

6.00%

6.50%

7.00%

7.50%

8.00%

8.50%

1992 1993 1994 1995 1996 1997 1998 1999 2000

5 years7 years10 years15 years20 years

Year

12

3. Bidder of issuance Bidding qualification: authorized

central government bond primary dealers

The present authorized dealers include:Banks 19Securities Firms 38Bills Financing Companies 13Investment Trust Companies 3

13

4. Holder of government bondsAuthorized dealers 50~60%

Banks 35~45%Securities firms 10~20%

Bills Financing companies Investment trust companies

Others 40~50%

14

Ⅳ . The Secondary Market 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.

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

Bonds & Stocks market trading volume

-

100,000

200,000

300,000

400,000

500,000

600,000

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Stock

Bond

Year

TradingVolume

16

However, the major bond transaction is on the repurchase basis, outright purchase transaction is few.

  FY 1998 FY 2000

Repurchase Transaction

94% 85%

Outright Transaction

6% 15%

17

The trading system of the secondary market1.Organized exchange

Players: securities dealers & brokersMatching method: computer biddingFee: 0.1%~0.05% depending on trading

volume Settlement: T+2

18

2.OTCPlayers: 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

Yield Curve

5.2

5.4

5.6

5.8

6

6.2

6.4

Jul 99 Aug 99 Sep 99 Oct 99 Nov 99 Dec 99 Jan 00 Feb 00 Mar 00 Apr 00 May 00 Jun 00

5 year bond7 year bond10 year bond15 year bond20 year bond

Month

YieldAverage

20

Bond Trading

0

500

1000

1500

2000

2500

3000

3500

Jul 99 Aug 99 Sep 99 Oct 99 Nov 99 Dec 99 Jan 00 Feb 00 Mar 00 Apr 00 May 00 Jun 00

5 year bond

7 year bond

10 year bond

15 year bond

20 year bond

TradingVolume

Month

21

V. Policies and Measures

1. Improvement of issuing systemFrom allocation to competitive biddingFrom price offer to interest rate offer

2. Increase of variety of bondsIssuing longer-term bonds

Issued first 10-year bond in Sep 22, 1993Issued first 15-year bond in Jun 16, 1995Issued first 20-year bond in Nov 24, 1998

22

Issuing zero-coupon bond Using Dutch bidding scheme to issue two

trenches of zero-coupon bond in Oct 20, 1995.

3. Providing purchasing channel to minor investorsFrom 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

4. Change to book-entry bondsIn Sep. 1997 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.

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

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

0.00%

9.24%

21.69%

57.19%

77.35%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Sep 97 Dec 97 Dec 98 Dec 99 Jun 00 Year

25

4. Providing more issuing information Working toward regular issuance

Making announcement on the bond issuing plan in quarter basis

26

5. To increase market liquiditySome 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

Measures takenTo 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

1. To improve management of government debt

2. To study the possibility of issuance on regular basis to reduce the negative impact of the irregular issuance on the monetary market.

29

3. To make government bonds as a benchmark indicator. A task force was set up to discuss

related issues and to work out possible solution.

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

4. To attract more participation of minor investorsTwo 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 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.