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1. What is the Book-entry T-Bond Trade? When is it launched?
This is a service where T-Bonds are traded between ICBC and investors via ICBC business offices (and e-Banking System), along with custody and settlement services.
The service was launched on June 3, 2002. Details can be checked at all ICBC business offices, through 95588 Phone-Banking or logon ICBC website.
2. What is the Book-entry T-Bond?
Book-entry T-Bond is a treasury bond issued by Ministry of Finance. Claims are reflected in T-Bond Custody Account. Investors are not required to hold physical certificates, but open a custody account at the custodian institution to record the bonds held on hand.
3. Who are the investors?
Besides financial institutions, the individual holding valid ID, company or legal entity are all eligible to trade T-Bond by opening a custody account at any commercial banks.
4. What is the difference between Book-entry T-Bond and Certificate T-Bond?
Trading Hours: Book-entry bond can be traded anytime. Certificate bond can only be purchased during the issuance.
Liquidity: Book-entry bond can be sold and bought anytime (repeatedly), very flexible. Certificate bond can only be drawn in advance (one-time) at commercial bank, very difficult to buy again.
Safekeeping: Vouchers of Certificate bonds are kept by investors, easy to lose. Book-entry bonds are in T-Bond Account, easy to trade.
Interest Payment: Interest on book-entry bond is paid annually; real yield is higher than coupon rate. Certificate bond repay principal and interest based on coupon rate at maturity.
Return: yield of certificate bond is fixed, or coupon rate; long-term holding of book-entry means stable return. If traded, book-entry bond varies according to interest rate. Those who trade sharp can get additional earnings.
Risk: interest rate of certificate bond is fixed. Earnings will drop if there are changes in market rate. Price of book-entry bond follows the market. Yield varies accordingly. Hence, it can be sold early to mitigate risk.
5. What is the difference between book-entry bond and the T-Bond traded at Exchange?
Place: T-Bond at Exchange has to have Securities Account opened at Securities Company. Book-entry bond processed through Bank. Account is opened at Bank.
Trading Fee: Trading T-Bond at Exchange has to pay fee based on turnover. Trading OTC T-Bond does not have to pay fee.
Closing: T-Bonds at Exchange are settled via order matching. Order is closed when buy/sell price and quantity are consistent. If not, no settlement or partially settled. Settlement of book-entry bond through Bank is market making. Order closed by immediate delivery.
6. What is the difference between book-entry bond and T-bond available at inter-bank market?
Inter-Bank bond market is a wholesale market. Members are institutional investors from financial circle, commercial banks, credit cooperatives, securities companies, insurance companies, financial companies and treasury bond. It is not a market for retail investors and non-financial institutional investors. Bonds are traded through price inquiry. Amount involved is huge.
Book-entry bond is the retail market. Investors are individuals and non-financial institutional investors. Trading is through market making. Fewer amounts involved.
7. What are the advantages in trading book-entry bonds?
Buying and trading book-entry bonds through commercial banks have the following advantages:
7.1. More channels for retail investors and companies to buy T-Bond, more new banking products offered.
7.2. Retail investors can trade book-entry bonds easily at any commercial bank outlets all over the country.
7.3. Investors can buy T-Bond anytime at commercial bank, or sell the bonds when in need of cash. More liquidity.
7.4. Book-entry bonds have rich varieties, flexible interest payment. Repayment of principal and interest can be one-time, or interest paid annually. Many choices are available for investors.
7.5. Additional earnings higher than coupon rate when T-Bond appreciates.
8. What are the advantages of trading OTC T-Bond through ICBC?
ICBC is China largest state-owned commercial bank with excellent credibility, strong capital base and the largest turnover in bond. ICBC well-developed service network is the greatest assurance to fulfill needs for all investors.
ICBC Trading System is scientifically designed. Investor can trade T-Bond just using the deposit account without any need to open new special account. Funds in trading T-Bond are cleared real time. Investors can make efficient use of capital fund to manage own financials in a great variety of ways.
ICBC business offices are widely covered. Bonds can be traded at different business offices. Moreover, ICBC is going to offer new services for investors to trade at home or office via online or phone.
9. Which cities that ICBC has the trading service opened?
Currently at Tier-1 ICBC branches and direct branches across the country. Service is available at all nationwide deposit and withdrawal business offices in major cites of all provinces (except Tibet).
10. What are the trading hours for the book-entry bond?
Every Monday to Friday, 10:00 – 15:30; notice will be given 2 working days in advance during national holidays or subject to rules of Peoples' Bank of China if no trading.
11. How to open T-Bond Custody Account at ICBC?
The investor holding valid ID should specify a local ICBC current account under the same name (as the bank account for trading OTC bond) and fill in the Custody Agreement and Application Form at the ICBC Business Office where this service is available. ICBC will open the custody account and issue "T-Bond Custody Account Card" to the investor.
Valid identification document that individual investor should hold: Resident ID Card or Temporary Resident ID Card within validity period, Residence Booklet, Military ID Card, Passport. Bank Account designated by individual investor should be the RMB Savings Account matched under Peony Money Link Card. If someone opens the account on behalf, valid identification document of this agent should be submitted.
12. What are the fees that investors have to pay for signing up the trading service?
(1) 10 Yuan for opening Custody Account, a one-time fee collected by ICBC when investors opening the account. (2) 50 Yuan for each non-trading transfer, 20 Yuan for each custody transfer, paid only during non-trading transfer or custody transfer.
13. How to buy/sell bond? What are the formalities?
Investors should have valid ID, T-Bond Trading Card (Money Link Card for individual investor, Customer Self-Service Card for company) and fill in T-Bond Buy/Sell Voucher at designated ICBC business office.
14. Any tax has to be paid for earnings?
According to rules, no tax is levied on interest income.
15. Can someone open the account or trade on behalf?
Whoever signing up the services on behalf of investor should hold valid ID of his own and the investor, fill in all vouches at designated ICBC business office.
16. Bond bought on a day can be sold out on the same day?
Yes
17. When will the monies be credited into account after the bond has been sold?
Monies will be credited real time into the bank account designated by the investor when opening the Custody Account.
18. Where to obtain the trade prices and information?
At designated ICBC Counter, through Phone Banking (95588), logon ICBC website (www.icbc.com.cn), China Bond Information Network (www.chinabond.com.cn) and so on.
19. How to check the bond balance and trading details?
Through 2 channels: ICBC business offices or China Government Securities Depository Trust & Clearing Co. Ltd. Investors make enquiry at ICBC Counter should hold T-Bond Trading Card and enter the password. Enquiry through Telephone Enquiry System of China Government Securities Depository Trust & Clearing Company (010-66005000) should enter the T-Bond Custody A/C No. and enquiry password. Initial enquiry password is the last 6 digits of ID No. (Individual Investor) or Organizational Institution Code Card (Institutional investor). Zero is inserted in front if less than 6 digits.
20. What is the custody transfer? How to apply?
Custody transfer is the transfer of custody between two custody accounts opened by the same investor, or transfer T-Bond on hand from one custody account to another custody account under the same investor.
Investors applying for the Service should hold valid ID, T-Bond Trading Card, T-Bond Account Card, fill in T-Bond Account Application Form (stamped with reserved seal in the case of institutional investors) at designated ICBC business office and pay (RMB 50) for the handing charge.
21. What is non-trading transfer? How to apply?
Non-Trading transfer is the ownership transfer of T-Bond due to court detention, insolvency liquidation, endowment or estate inheritance.
Three types of non-trading transfer:
(1) Arising from court detention, insolvency liquidation:
The Justice Department of concern should fill in T-Bond Account Application Form at designated ICBC business office, produce justice documents and the custody account to receive the transfer. Transfer will be made after the approval from ICBC Management Department.
(2) Due to endowment:
The donor should fill in T-Bond Account Application Form at designated ICBC business office, together with T-Bond Trading Card, T-Bond Account Card and own valid ID and provide the custody account to receive the endowment. Transfer will be made after the approval from ICBC Management Department.
(3) Owing to estate inheritance.
The applicant applying at designated ICBC Counter should surrender justice document, T-Bond Trading Card, T-Bond Account Card, own valid ID, and custody account to receive the inheritance. Transfer will be made after the approval from ICBC Management Department.
22. How the rule of the enquiry password at China Government Securities Depository Trust & Clearing Company is specified? What happen if the password is forgotten?
Enquiry Password is the last 6 digits of ID No. (individual investor) or Organizational Institution Code Card (institutional investor). Zero is inserted in front if less than 6 digits.
Should password be forgotten, the investor can bring along own valid ID to the ICBC business office where this service is available to initialize the password (change back to the source password).
23. What is the difference between Net Price and Full Price?
Net Price is the bond price after deducting the accrued interest calculated by nominal yield. Full Price is net price plus accrued interest.
Ex: Today is July 17 Starting from June 6, the value date of the bond, number of holding days till July 17 is one month and 11 days, or 41 days. Interest for bond denominated in 100 Yuan is 100*2%/365*41=0.22 Yuan. If the Net Sell Price is 100 Yuan, then Full Sell Price in 100.22 Yuan. Net Price trades are listed in net price. Full Price is used to calculate actual payment and receipt.
According to rules, OTC bonds are traded in net price in order to truly reflect the changes of bond value for investors to analyze the movement. If bond value does not change, full price will rise naturally as number of holding days increase. Considering the full price only will create a misconception that the bond appreciates. Only changes in Net Price can reflect the changes. Net Sell Price of this bond is 100 Yuan from the issue date till today, no value increased, yet the full price has gone up to 100.22 Yuan.
24. How to choose the right opportunity to buy/sell?
Under three situations:
(1) There is no difference when to buy if Net Sell Price of the bond does not change. Full Price increases as time goes by. It only indicates the increase of interest included in the bond. Investor has to pay more based on full price. But the extra interest will be returned by the interest included in the bond. Therefore, investment cost will not rise if net price remains unchanged.
(2) Trading involves spread. Buy and sell on the same day will definitely lose since buy is lower than sell in Bank. To investors, buy is higher than sell. Investors will lose if the too short a time to hold the bond. Hence, minimum holding days should be calculated in order not to lose. In other words, interest accrued during holding period fewer earnings between price difference in buy and sell should be higher than the after-tax interest income of demand deposit. Let's use ICBC today's quote as an example. Net buy price of the bond denominated in 100 Yuan is 99.95 Yuan, net sell price is 100.01 Yuan, spread is 0.06 Yuan, accrued interest is 0.22 Yuan, 100*2%/365* No. of days - 0.06 6≥100*0.72%/365*No. of days*(1-20%). Result shows that No. of days ≥ 15 days. This means that investors only hold for more than 15 days will definitely have better return from demand deposit, the longer the days, the better the yield.
(3) Price of OTC T-Bond is closely related to the market changes. Sharp judgment will bring additional yield. Bond price is inversely proportionally to market interest rate. Interest rate going down will cause bond price going up. Interest rate going up will cause bond price going down. Investor can buy in bulk if he expects interest rate will decline. Hence, significant return will be gained if bond is sold at a time when interest rate really falls to trigger bond price going up. If the investor forecasts interest rate will rise, he can sell the bond in hand to gain first. Later, he can buy when interest rate really rises to cause bond price down. Real yield at this time will be higher than coupon rate.
25. What are the risks involved in trading over-the-counter?
Main risk lies in the interest rate. Loss can be incurred when changes in interest rate cause the fluctuation of bond price. When interest rate jump and bond price slid after investors buy the bond, sell at this time will cause loss (buy high and sell low). If investors continue to hold the bond, no actual loss since he can earn fixed nominal interest.
If bonds are held shorter than the minimum duration, interest income will be less than that of demand deposit.
26. What are the advantages of OTC T-Bond over deposit?
Judging from nominal yield, OTC T-Bond in this period is 7 years, but interest rate is only 2% which is lower than that of 5-year fixed deposit. Apparently this is not attractive. However, OTC T-Bond has higher liquidity than fixed deposit. It may be a good move so long as it is not held till maturity.
Ex. 1: A fixed deposit of RMB 10,000 for 5 years, withdrawn a year later for emergency. Bank will only pay interest at the rate of demand deposit which is 10000*0.72%*(1-20%)=57.6 Yuan. In the case of buying OTC Bond and selling a year later, the actual interest income is 10000*2%-0.06*10000/100=194 Yuan, 136.4 Yuan more than the former, or 3.4-fold return. Hence, as long as it is possible to withdraw in advance, it is very disadvantageous to deposit as fixed deposit.
Ex. 2: Interest rate of 3-year fixed deposit is 2.52%, 2.016% after-tax. Nominal yield of holding OTC T-Bond for 3 years is 2%, but interest paid annually. Average yield in 3 years is 2.04%, which is higher than 3-year fixed deposit. Hence, even there is no early withdrawal, earnings of 3-year fixed deposit is not as attractive as OTC T-Bond.
Ex. 3: Assume interest rate will be driven down in the next 3 years. Though interest rate of the original 3-year fixed deposit will not be adjusted downward, however, bond price will eventually soar.
Ex. 4: Liquidity of OTC T-Bond is similar to a flexible fixed-demand deposit. If a 3-year fixed-demand deposit is withdrawn after 3 full months, interest calculated is 60% of 3-month rate 1.71% , actual return is 10000*1.71%*60%/12*3*(1-20%)=20.52 Yuan. Earnings for holding OTC T-Bond for 3 months will be 10000*2%/12*3-0.06*10000/100=44 Yuan, 23.48 Yuan more, or 2.1 times.
Conclusion: Owing to the strong liquidity of OTC T-Bond, we can treat it as a "Demand Deposit" with return higher than fixed deposit instead of a 7-year T-Bond. Investors can use a majority of idle money to buy OTC T-Bond without affecting the use of cash anytime, yet with handsome return.
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