Electronic Savings Bond - A New Variety of T-bond

Editor’s Notes:

The T-bond will be issued on 1 July. But it is different from T-bonds before, electronic savings bond is a new variety of T-bonds. It is as secure as the certificate T-bond. It also offers such conveniences in terms of purchase, cash and inquiry for investors and it is a new choice for investor to select of T-bonds with changeable terms. From 26 June, you may open the T-bond account in any bank with agent qualification. The clients who are inclined to T-bond investment may know more from this introduction of electronic savings bonds.

Understanding T-Bonds before Buying Them Next Month

The new electronic savings bond will be issued towards individuals on 1 July. Maybe not everyone has a clear understanding on how to make investment on this product, but its transparent effect of this bond is easily seen.

Clear sales. You may know that it is the same to purchase the T-bond in Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China or China Construction Bank, but you may not know the amount of T-bonds sold by these banks. Which government agency is in charge of this matter? Who decides the issuance quota of administrative allocation? Great changes have been made on the distribution of issuance quota and selling mechanism of electronic savings bonds. First each administering bank burdens basic underwriting amount. It is allowed to obtain remaining quota through computer random selection based on certain rules. This provides wide space for the competition among commercial banks. The basic quota reflects the consideration on fairness and the random selection of remaining quota focuses more upon efficiency.

Clear purchase. Those people who have experiences with T-bonds know that they should stand in a correct line and choose the right outlets with fewer residents around them. Those people who are well informed may know that some clients will purchase large amount of T-bonds in a certain outlet, they will not choose such outlets. But it takes more time and energy for these people to get information. The electronic savings bond makes it possible for interoperability of national issuance systems. Adjustment can be made across different regions and different banks. The people do not need to be detectives any more. We will not see that it is sold out in some regions while there is surplus in some regions.

Clear inquiry. The T-bond is a main channel for the government to raise financial funds for construction. It is very important for supervise and manage T-bonds from the issuance to cashing. The finance system, the People’s Bank of China and China Government Securities Depository Trust & Clearing CO. LTD are supervisors and managers of T-bonds. The data collected in electronic method are objective, integrated and accurate, which may enhance the control of managing departments over the products. The individual investor may recheck and inquiry obligatory rights through the voice recheck and inquiry system. All of these together consist of a comparatively integrated supervising system.

If you invest 10 thousand yuan on electronic savings bonds, you may get additional 164 yuan

If you purchase the electronic savings bonds, how much more earnings you may get than the savings deposit? Now we would like do a calculation for you.

Based on rules, 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. 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.

Comparison of Three Types of T-bonds

Upcoming Electronic Savings Bonds and Existing Certificate T-bond

Similarities

1. They both belong to savings bonds and they are based on national credit.

2. They are both free of interest taxes.

Differences	Certificate T-bond	Electronic Savings Bonds
Application Procedures	Investor may directly purchase with cash.	Investor needs to open a personal T-bond custody account and designate the corresponding capital account.
Recording Forms of Obligatory Rights	Investor needs to fill out the receipt voucher of certificate T-bond of the People’s Republic of China. Administering banks and investors are responsible for management.	The obligatory rights of electronic savings bonds are recorded electronically. The electronic savings bonds adopt the secondary custody system. All administering bank headquarters and China Government Securities Depository Trust & Clearing CO. LTD will conduct consolidated management of savings bonds, which may reduce investors’ risks of keeping paper certificates of obligatory rights.
Interest Payment Methods	The principal and interest are paid off one time.	The interest may be paid annually or paid off together with principal.
Cashing Methods upon Maturity	When the certificate T-bond expires, the investor may cash it at the outlet of administering banks. The interests are not added for overdue days.	When the electronic savings bonds expires, administering 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.
Targets	Individuals and some organizations	Only individuals are allowed to purchase savings bonds (electronic) and organizations are forbidden to purchase or hold.
Administering Organizations	The certificate T-bond may be sold and cashed at outlets of 37 members of certificate T-bond underwriting groups composed by commercial banks and the postal savings service organizations across the nation.	MOF and PBC confirm that 7 commercial banks have obtained the qualification to sell electronic savings bonds over the counters of their outlet as the agent banks.

Electronic Savings Bonds and Book-Entry T-bond

Differences	Book-Entry T-bond	Electronic Savings Bonds
Targets	Individual and organizations	Only individual investor within the territory of China
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.
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.
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.	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.

Two Choices for Purchasing T-bonds

During the pilot phase, there are two types of electronic savings bonds for consumers’ choices: 1) fixed interest rate and fixed term; 2) fixed interest rate and flexible term.

Electronic T-bond with fixed interest rate and fixed term. The term and interest rate (stated interest rate) are confirmed when it is issued. There are two interest-paying methods such as one-time payment of principal and interest together, or the payment of interest on a regular term. One-time payment of principal and interest together is the same as the certificate T-bond. For example the stated interest rate of savings bond with fixed interest rate and term is 3.14%. The interest is paid annually and calculated from 1 July 2006.

The electronic T-bonds with fixed interest rate and flexible term. Investors may choose holding to maturity or they may apply for terminating their obligatory rights and debts when their holding reached the stipulated term. If you want to terminate your investment, the interest rate is calculated according to the agreed rate. Because investors have rights to choose, the term of this kind of T-bond is flexible actually (decided by investors). No matter investors choose to hold it until maturity or terminate their investments, the interest rate is confirmed in advance. It will not change with the overall market interest rate. That is to say that the interest rate is fixed and it is paid off together the principal. Investors may decide whether to continue to hold T-bonds according to the change of yield ratio of other investment products. This may satisfy investors’ needs for using funds flexible and maximizing the returns of investment. For example the annual interest for T-bond with fixed rate and flexible term is 5% for a 10-year term. The interest is calculated from 1 July 2006. Investors may terminate their investment when they hold it for 3, 5, or 7 years. The annual interest rate for a 3-year term is 3%, 3.5% a 5-year term and 4% a 7-year term. Investors are not allowed to apply for terminating investment 20 working days before maturity dates.

According to the arrangements by MOF, the bonds with fixed interest rate and term will be the first pilot electronic T-bonds to be issued. The interest is paid annually.

Seven Administering Banks for Selling Electronic Savings Bonds

MOF and the People’s Bank of China 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.

If you want to know more about the policy and issuance information, please use the following channels.

1. MOF entrusts the National Debt Association of China (NDAC) to offer policy consultations on related insurance information of savings bonds. The consultation hotline of NDAC is 010-68081427 and 010-68081167.

2. You may go to nearby outlets of these 7 administering banks for consultation.

3. You may can the banking service hotline for more details of savings bonds. The hotline of these administering banks: 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).

4. You may log on the website of MOF to read the issuance bulletin. The website of MOF is http://www.mof.gov.cn

Purchasing Procedures

I. Open the Long Securities Card

Please take your valid ID card and Long Savings Card (the wealth management card and the combined bankbook for RMB & FC demand deposits) and go to the outlets of CCB selling the electronic savings bonds (please read the bulletin of CCB for more details) to apply for Long Securities Card and establish the account transfer relationship between the savings card (the wealth management card and the combined bankbook for RMB & FC demand deposits) and the securities capital account. If you have the securities card, you may directly go to the outlet for this business where you opened your securities card.

II. Account Transfer

Before you purchase the electronic savings bonds, you should transfer the corresponding capitals from the savings card (the wealth management card and the combined bankbook for RMB & FC demand deposits) to the securities capital account. You may choose the one-way automatic transfer function. When you purchase the bond, the system will automatically complete the transfer.

III. Open the T-bond Account

Before you purchase the electronic savings bonds, you need to open a T-bond account. You may choose to add the T-bond account while you apply for the securities card or you may open the T-bond account at outlets of CCB with your ID card after you have opened the securities card. If you have opened the T-bond account, you may directly go to purchase the electronic savings bonds.

Ⅳ Other Services

You may take your valid ID card and securities card to go to the outlets of CCB to subscribe electronic savings bond, cashing the bond before maturity, terminate investment, apply for pledge-backed loans, make non-transactional account transfer and apply for certificate of deposit.

Ⅴ Interest Payment and Cashing

At the agreed interest payment and cashing date, your interest or funds including principal and interest will be recorded to your securities capital account. You do not need to go through any procedures. At the agreed interest payment and cashing date, you may go to the outlets of CCB to transfer your capitals from the securities capital account to your savings card (the wealth management card and the combined bankbook for RMB & FC demand deposits) so as to use your capitals conveniently.

VI Information Access and Reconciliation

When you purchase the electronic savings bonds you may go to the outlets or call the service hotline of CCB for T-bond balance access. From the second day when you purchase the electronic savings bonds you may recheck and inquire your T-bond balances through the T-bond recheck and inquiry system of China Government Securities Depository Trust & Clearing CO.LTD (Tel: 010-66005000) from 0:00 a.m. to 17:00 p.m.

Links

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.

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.