Chap13 Tap

602 Government Bond Market Development in Asia
13
TAIPEI,CHINA
Li-Yen Paul Hsueh
Executive Summary
In the aftermath of Asian nancial crisis, bearish equity markets

made it di¹cult for rms to raise equity funds, tight credit control lim-
ited the availability of business loans, and a depreciated local currency
increased the cost of o¬shore borrowing.
The domestic bond market thus came increasingly to be seen as an
important alternative source of fund-raising for the private and public
sectors in Taipei,China.
As in other Asian countries, the development of a domestic bond
market in Taipei,China is only a recent phenomenon. For a long time,
the stock market had played a dominant role in the nancial market,
and commercial loans were the main source of funds for businesses be-
sides equity. Direct nancing was rare, and liquidity in the secondary
debt market was low.
The Government of Taipei,China began issuing treasury securities
more than 50 years ago. The bond market never developed in any mean-
ingful way until a decade ago, however, when the Government switched
its scal policy to focus more on infrastructure developments, relying
more on debt issuance as a funding source. The outstanding volume of
government bonds before 1990 was less than New Taiwan (NT) $200
billion, but had reached nearly NT$1.2 trillion (US$38 billion) by the
end of 1999.
As a percentage of gross domestic product (GDP), the amount of
government bonds outstanding in Taipei,China is relatively low, cur-
rently around 14 percent, compared with 60 percent in the US, 110
percent in Japan, 97 percent in Singapore, and 30 percent in Hong Kong,
China. This suggests that the government bond market still has plenty
of room for further development. However, current budgetary laws put a
cap on the maximum size of government borrowing and total amount of
debt outstanding.
Taipei,China 603
The rapid growth of the local economy, along with a favorable

interest rate environment, has also encouraged rms to aggressively tap the
corporate bond market. Direct nancing has replaced bank loans as the
main source of funds for many businesses. Although small in size when
compared with its government counterpart, the corporate bond market
has also seen tremendous growth in recent years, with the outstanding
volume of corporate bonds surpassing NT$450 billion (US$15 billion)
by 1999.
A third component of the domestic debt market is made up of
foreign bonds, which are currently issued only by supranational organi-
zations such as the Asian Development Bank (ADB) and European Bank
for Reconstruction and Development (EBRD). Their new issue volume
has increased steadily since 1995, with the total outstanding volume
now surpassing NT$80 billion. However, government bonds dominate
the domestic debt market with more than 70 percent of the market share.
Corporate bonds account for a further 25 percent, and foreign bonds the
balance.
The liberalization of the nancial market has played a major role
in overall nancial policy in recent years. Although the Asian nancial
crisis demonstrated the potential risks associated with such liberaliza-
tion, especially for the nancial sector, the Governments longstanding
policy of gradual opening has helped lessen the impact of the crisis.
Having applied for World Trade Organization (WTO) accession, the Gov-
ernment is modifying relevant laws and regulations to meet the
requirements. The foreign ownership ceiling of local companies, for ex-
ample, has been raised to 50 percent and will eventually be lifted all
together. Repatriation of foreign investors principal capital and prots
has also been abolished recently. Other limitations on foreign invest-
ment are also scheduled for change in the near future, such as the securities
and foreign exchange marketsmaking the local market even more at-
tractive to foreign investors.
The development of a deep and liquid domestic bond market has
been a priority for the Government. The issuance of government bonds
in book-entry form was implemented in September 1997 and has now
become the mainstay of the secondary market. The Government is also
studying various ways to modify the bond settlement/clearing system,
and other issues relating to the development of an e¹cient bond market,
such as lifting transaction tax on corporate and nancial securities, in-
troducing bond futures and options, and enhancing the credit ratings
system by means of qualied credit rating agencies.
Since 1992, the issuance of government bonds has been conducted
using multiple-price sealed-bid auctions, a switch from the original xed-
price allocation. Short- and medium-term government bonds (two- to

seven-year maturities) were issued in the early stages. In order to spread
out bond redemption dates and extend bond duration, longer-term gov-
ernment bonds were gradually included. The rst 10-year government
bond was issued in 1993, followed by a 15-year tenor in 1994 and a 20-
year tenor in 1998.
Only institutions with government security dealer status are al-
lowed to participate in the primary bond auction. Individuals and other
institutional investors who wish to participate in the primary auction
must do so through qualied dealers. Currently there are 71 government
security dealers in this market, more than twice the number of primary
dealers in the US, where the Treasury market is almost 100 times larger.
The outstanding government bonds in the market have a well-spaced
maturity range, providing a good basis for establishing a risk-free benchmark
yield curve. However, inactive secondary market transaction (outright
buy and sell), along with other market impediments, have degraded the
benchmarking function of the government bond yield curve in the market.
Annual trading volume for government bonds in Taipei,China
averages NT$50 trillion (with NT$1.2 trillion outstanding). This seemingly
high turnover rate is enabled by an immensely popular repurchase
agreement (repo) market. In fact, outright trading accounts for less than
10 percent of the total market, with a daily trading volume of less than
2 percent of outstanding volume (compared to nearly 16 percent in Hong
Kong, China). This lack of liquidity can be attributed to a number of
factors, including insu¹cient supply of government bonds, the lack of a
benchmark yield curve, and commercial banks preference to hold bonds
for meeting their reserve requirements.
The unique role of repos in the domestic market is mainly due to
the tax arbitrage incentive. A di¬erential tax treatment exists between
institutional and individual investors. Individual investors are taxed on
a cash basis, and hence tend to hold bonds between coupon payment
dates and sell them back to securities rms who are taxed on an accrual
basis. Consequently, individual investors essentially receive tax-free income
through repo transactions and security rms obtain low cost of fund to
nance the security purchase. Because of this tax arbitrage in the repo
market, the government bond yield curve is depressed to an estimated
75100 basis points (bps).
The book-entry system was implemented in 1998 for government
bonds, and these scriptless securities are cleared through a centralized
clearing system under the Central Bank of China (CBC). Currently,
payments are transferred through the CBC Inter-Bank Funds Transfer
System (CIFS), which works electronically and can be on both a real-time
Taipei,China 605
and designated-time basis, the latter settled on a net basis at the end of
each business day. To reduce settlement risks and establish a system
which conforms to international standards, the CBC is restructuring the
CIFS to abolish designated-time settlement and make real-time gross
settlement (RTG) the only settlement mode.
Settlement of government bond transactions occurs within three days
(T+3) of the transaction date. Normally, the seller species the exact
date and place where the settlement and physical delivery of scripts are
to occur. Although funds for repo transactions are transferred through
electronic fund transfer, proceeds for outright transactions are normally
through bank-issued checks drawn on the Bank of Taiwan.
The Government provides a favorable regulatory framework for the
development of the domestic debt market. The main regulatory authori-
ties include the CBC, the Ministry of Finance (MOF), and the Securities
and Futures Commissions (SFC).
The Government has long recognized the importance of a well-
functioning bond market, and serious e¬orts have been made to improve
e¹ciency. The introduction of the book-entry system has proved an e¬ective
means of doing this. A bill has also been drafted to exempt the transac-
tion tax on corporate and nancial bonds, to smooth the issuance and
circulation of corporate bonds. However, many impediments still exist,
and require rapid attention.
Besides its low liquidity, another troublesome feature of the do-
mestic bond market is the lack of market depth. Since the main purpose
of government bond issuance is to bridge the gap in budgetary shortfall,
the amount of budget decit dictates the issuing volume. This lack of
issuance regularity increases market uncertainly and causes market par-
ticipants to focus unduly on new issues, heightening market yield sensitivity
to bond auction announcements.
Under current tax laws, the calculated taxable coupon income is
based on the coupon rate and face value of the bond, regardless of
whether the bond was purchased at a premium or discount. Consequently,
the taxable basis for discount bond investment will be lower, whereas the
basis for premium bonds is higher, resulting in yield distortion in the
market.
Computer-assisted trading systems for government bonds are avail-
able in both the Taiwan Stock Exchange (TSE) and over-the-counter
(OTC), but daily transactions are still done by telephone. With an increasing
number of bond dealers in the market, this puts a heavy burden on the
communication system and reduces e¹ciency.
Recommended directions for the establishment of a more e¹cient
domestic debt market could include (i) the introduction of a regular,
predictable schedule for o¬ering government bonds; (ii) bond reopening

to increase liquidity; (iii) changing of the bond auction technique to a
more e¹cient single-price auction; (iv) the introduction of forward trad-
ing and bond lending, which could e¬ectively broaden the scope of
delayed-settlement trading, and facilitate risk hedging; (v) trading of
bond futures, which should contribute signicantly to the establishment
of a benchmark yield curve; and (vi) a netting clearing and settlement
system, which could reduce settlement costs, traders reliance on credit
lines, and prevent settlement loop situations.
In addition, removal of di¬erential treatment of coupon taxation
between individual and institutional investors would eliminate the tax
arbitrage in the repo market.
The Government is proposing a new taxation bill to eliminate this
incentive. Care, however, must be taken to reduce the possible negative
impact of new taxation rules on government bonds already outstanding.
It is suggested that the new law is nonretroactive and applicable only to
newly issued bonds to maintain the existing equilibrium in the market.
To eliminate the bias towards premium bonds in the market, since
the calculation of taxable coupon is based on the bond coupon rate,
coupon income can be calculated on a yield basis, i.e., based on the
purchased yield to maturity.
The Government should consider revising the related security trad-
ing laws to encourage when-issued (WI) trading of government bonds,
which provides a price discovery function and valuable risk hedging
functions to government bond dealers entering the auction. Potential
problems associated with WI trading, such as short squeeze, can easily
be prevented through the introduction of careful rules and regulations.
I. Fiscal Policy and Management
MOF enforces national scal policies. It is charged with maintain-

ing a balanced budget, raising funds to meeting the needs of national
economic development, regulating public Treasury systems and super-
vising Treasury administration at all levels of government, adjusting
revenues and expenditures, and securing economic stability through
government debt policy. Its major areas of responsibility include the
National Treasury, customs, insurance, taxation, banking, securities and
futures administration, and management of national property.
The Governments guidelines for the formulation and management
of its scal policies include (i) e¹cient allocation of nancial resources
to support major construction programs; (ii) strict enforcement of bud-
geting and operation of government bonds to establish sound nancial
Taipei,China 607
status; (iii) improvement of tax structure to promote economic develop-

ment; (iv) improvement of customs and taxation administration to enhance
e¹ciency of collection and provide more convenient services to taxpay-
ers; (v) improvement of nancial and insurance systems to promote
modernization and internationalization; and (vi) strengthening the func-
tion of the capital and money markets to promote economic development.
In the area of Treasury management, emphasis is on coordination
of scal policies to support economic development and strengthening of
public debt management to raise funds for national construction. In the
area of monetary administration, focus is on promoting nancial liberal-
ization and internationalization, as well fullling nancial systematization
and modernization. Appendix 1 details the guidelines for formulation
and management of scal policies.
A. Government Revenue
The main source of government income in Taipei,China is taxes

and monopolies, accounting for slightly over 65 percent of total revenue
for all levels of government. In recent years, revenues from government
bonds and loans have increased gradually. The governments emphasis
on the development of infrastructure and social sectors since 1990 has
increased reliance on proceeds from the issuance of government bonds,
making the development of a deep and liquid domestic bond market a
government priority.
Other sources of income are revenues from the earnings of public
enterprises and loans for economic construction. Table 1 shows the revenue
structure for all levels of government in Taipei,China between scal years
1987 and 1996.
TABLE 1
Share of Government Revenue by Source, 1987 and 1996
(percent)
Source 1987 1996

Taxes and Monopolies 65.2 64.4
Earnings of Public Enterprises 14.5 8.1
Receipts from Loans for Economic Construction 1.2 4.9
Proceeds from Issues of Government Bonds 6.8 8.5
Surplus of Previous Fiscal Years 0.1 4.2
Others 12.2 9.9
Total Revenue (in NT$ billion) 650.0 1,565.0
Source: MOF reports.
B. Government Expenditure
At all levels of government, expenditure for national defense, edu-

cation, science, culture, social security and economic development has
accounted for the largest part of total expenditure. The National Six-
Year Infrastructure Plan, which started in the early 1990s, has persistently
pushed forward economic growth in the region. The island-wide high-
speed railway system construction plan, which has a budget of nearly
NT$5 trillion, is expected to help keep economic momentum going for
years to come. In terms of growth trends, expenditure for obligations
and social security have increased enormously in recent years, while
expenditure for economic development and national defense have declined.
Table 2 compares the expenditure structure for all levels of government
in scal years 1987 and 1996.
TABLE 2
Share of Government Expenditure Structure by Sector, 1987 and 1996
(percent)
Expenditure 1987 1996
Economic Development 25.9 13.2

National Defense 22.5 13.0
Education, Science and Culture 20.2 21.7
Social Security 15.6 25.7
General Administration 10.9 13.0
Obligations 4.1 12.0
Miscellaneous 0.8 1.6
Total Expenditure (in NT$ billion) 662.1 1,897.4
Since 1989, the decit increased due to expenditure on reserve

land for local government public facilities, as well as the promotion of
major public construction projects, but the gap narrowed in recent years,
with a balanced budget attained in 1998.
C. Financing of Fiscal Decits
The Government has switched from its traditional goal of main-

taining a scal surplus to focus more on infrastructure development.
Consequently, there is a decit scal policy, which entails a signicant
increase in the issuance of government bonds in order to fund a series of
Taipei,China 609
FIGURE 1
Governments Revenue and Expenditure
as a Percentage of GDP, 1999
18
17
16
15
Percent
14
13
12
11
10
91 92 93 94 95 96 97 98 99
Year
Revenue/GDP Expenditure/GDP
Source: Statistical Releases, MOF.
FIGURE 2
Government Borrowings as a Percentage of
Total Expenditure, 1999
35
30
25
Percent
20
15
10
0
91 92 93 94 95 96 97 98 99
Year
Source: Statistical Releases, MOF.

expansionary scal policies, such as the National Development Plan

initiated in early 1990s.
The CBC acts as the scal agent for the Government, and is re-
sponsible for conducting the issuance of government bonds. Since the
main purpose of government bond issuance is to obtain necessary fund-
ing for national development, this is mainly done on a need basis.
Consequently, the issuing authorities do not observe a regular calendar
of bond issuance, as is done in the US. The abolition of the provincial
government (to streamline governmental structure) in 1999, however, sig-
nicantly increased the Governments funding needs for the following
year, providing room for more regular debt issuance. However, current
budgetary laws place a limit on government borrowing and total amount
of debt outstanding.
Meanwhile, to promote economic development through productive
facilities and techniques from abroad, the Government has established
nancing arrangements with foreign governments, nancing institutions,
and suppliers. The major components of this outstanding external public
debt include electric power development (30 percent) and communica-
tion and transportation facilities (51 percent), while items such as water
supply and general economic development projects account for the bal-
ance. Over the past years, however, the amount of external public debt
has decreased steadily, from more than US$1.8 billion in 1987 to less
than US$60 million in 1999. Table 3 shows the amount of external
public debt over time and the debt-service ratio, which is the percentage
of external debt over total export of goods and services in the same
year.
TABLE 3
External Public Debt and DebtService Ratio
(US$ million)
1991 1992 1993 1994 1995 1996 1997 1998 1999
A mount 713 455 395 360 305 165 106 55 59

Debt-Service ratio (%) 0.3 0.3 0.1 0.1 0.1 0.11 0.04 0.04 0.01
Source: Central Bank of China reports.
D. Special Issues
Tax Relief. To promote economic development and encourage exports, the

Government has reduced part of the tax revenue by granting tax exemp-
tions and rebates (Table 4).
Taipei,China 611
TABLE 4
Tax Relief as a Percentage of Tax Revenue
Tax Reduction/Exemption Tax Rebate for Export Total Tax Relief
1990 5.6 0.7 6.3

1991 5.2 0.6 5.8
1992 4.2 0.4 4.6
1993 3.4 0.4 3.8
1994 2.1 0.3 2.4
1995 1.5 0.3 1.8
1996 1.4 0.4 1.8
1997 2.4 0.4 2.8
1998 3.0 0.3 3.3
To accelerate industrial development and better accommodate

domestic supply and demand, the Government adjusts tari¬ rates on
daily necessities and industrial raw materials. These measures have con-
tributed to domestic price stability, economic development, and industrial
competitiveness. For implementation of policy on economic internation-
alization and trade liberalization, the Government sets the target of the
average e¬ective rate to be comparable to that in industrialized coun-
tries. The average rate and the average e¬ective rate of tari¬ fell from
9.65 percent and 5.4 percent in 1990 to 8.25 percent and 3.13 percent
in 1998, respectively, after tari¬ reduction programs were enforced.
Development Fund. To upgrade the industrial structure of the nation,

the Executive Yuan (executive branch of the government) established a
so-called Development Fund in 1973. The purposes of this fund include
(i) investing in, or providing loans to, important enterprises or plans
relating to industrial structure upgrading; (ii) providing loans in line
with government industrial policy for assisting the sound development
of industries; (iii) providing necessary assistance to the development of
small and/or medium enterprises by setting aside an appropriate percent-
age of the Development Fund as support; and (iv) taking coordinated
action for the furtherance of plans initiated by competent authorities
concerned with the provision of advanced training to personnel, pollu-
tion control, acceleration of improvement of industrial structure and/or
improvement of economic development.
Since the introduction of the fund, various investments and loans
have been made to di¬erent industries, including information, semiconductor,
and biotechnical, to name a few. Total funding provided up to 1998 in-
cluded NT$29.47 billion for investment and NT$57.78 billion for loans.
E. Liberalization and World Trade Organization Accession
The liberalization of the nancial market has also been a major

part of overall nancial policy. The Asian nancial crisis showed that
liberalization involves potential risks for the nancial sector. The
Governments longstanding policy of gradual opening, however, has helped
to lessen the impact of the crisis on Taipei,China. In applying for WTO
accession, the Government is modifying all relevant laws and regula-
tions to meet requirements. For example, the foreign ownership ceiling
of local companies has been raised to 50 percent and will eventually be
lifted, and repatriation of foreign investors principal capital and prots
have been abolished recently. Other limits on foreign investment are
also scheduled for change in the near future, for example in the securi-
ties and forex markets, making the local market even more attractive to
foreign investors.
II. Monetary Policy and Management
The CBC is the highest monetary authority in Taipei,China and

has completely independent control over monetary policies. It has long
been committed to maintaining economic and nancial stability in the
region to create a conducive environment for continued economic growth,
and Taipei,China has enjoyed sustained economic growth and low ina-
tion over recent decades. The annual growth rate of GDP has long been
kept in double digits, and fell to around 8 percent only in recent years.
The growth rate of consumer prices, on the other hand, has been kept
below 4 percent (Figure 3).
Major operations of the CBC include regulating the nations nan-
cial conditions, implementing foreign exchange regulations and operations,
examining nancial institutions, issuing currency, providing check clearing
and check credit information services, performing scal agency func-
tions for the Government, and representing the Government in international
nancial cooperation.
A. Monetary Policy Tools
The CBCs main policy instruments include open market opera-

tions (OMOs), rediscounts and temporary accommodation facilities, reserve
requirements, nancial institution redeposits, and selective credit con-
trols. As in many countries, OMOs are the most important and exible
monetary policy tools. The CBCs OMO Division is responsible for the
day-to-day ow of funds in the money market. It issues negotiable
Taipei,China 613
FIGURE 3
Annual Growth Rate of GDP and Consumer Prices
9
8
7
6
Percent
5
4
3
2
1
0
89 90 91 92 93 94 95 96 97 98
Year
GDP Consumer Price
Source: Central Bank of China Financial Statistics Monthly.
certicates of deposits (NCDs) to adjust liquidity in the market and pro-

vide liquidity through repo transactions, in which government bonds are
the main instruments.
The CBC implements its discount policy mainly through accom-
modation against secured loans to banks. The interest rate on these
accommodations with collateral was at 4.88 percent in 1999, relative to
4.77 percent in the call loan market. The CBC discount window divi-
sion establishes the rediscount rate and serves as a source of funds by
buying commercial paper from the market. The current rediscount rate is
at 4.5 percent. Liquidity in the market may also be regulated by the
CBC, through the acceptance or release of redeposits from banks and
the postal savings system (PSS). The PSS accepts deposits from the gen-
eral public but cannot make loans. It therefore places its deposits with
the CBC and other banks, or invests in highly liquid nancial assets.
Since nancial institutions redeposits accounted for nearly 70 percent
of the reserve money in 1999 (85 percent in 1998), the redeposit policy
has been a powerful monetary tool for the CBC.
The reserve requirements for various deposit accounts have been
adjusted downward in the past, and more frequently in recent years,
having been lowered on ten occasions since 1996. The weighted-aver-
age required reserve ratio has decreased from 16.2 percent in 1989 to
less then 8 percent at present. Lower interest rates have reduced the cost
of capital for domestic rms and improved the competitiveness of do-

mestic banks.
The CBC adopts an intermediate targeting strategy and uses the
monetary aggregate M2 for its target variable. To ensure transparency
and conform to its commitment to price stability, the CBC announces at
the beginning of each year a target range for the growth rate of M2 The
range of 1015 percent was set between 1990 and 1995, 914 percent for
1996 and 1997, and 612 percent in 1998. For the scal year 19992000,
the target was set between 611 percent. The average growth rate of M2
has usually been kept within the range (Figure 4).
FIGURE 4
Annual Growth Rate of M2 and Key Interest Rates
18
16
14
12
Percent
10
0
93 94 95 96 97 98 99
Year
M2 Rediscount Prime Interbank
Source: Central Bank of China Financial Statistics Monthly.
B. Foreign Exchange Rate Policy
Taipei,China has adopted a oating exchange rate regime since

1979. The New Taiwan (NT) dollar oats freely against all other curren-
cies, and exchange rates are determined by the market. CBC intervenes
only to smooth out seasonal and irregular factors. Aiming to promote
Taipei,China as a regional nancial center, CBC has adopted a series of
measures to gradually remove controls over the exchange rate. Increased
Taipei,China 615
capital movements and the move toward more exible exchange rate
arrangements have increased the volatility of the exchange rate. Since
the NT$ exchange rate is mostly determined by balance of payments,
monetary policy has a relatively limited inuence here.
C. Impact of Liberalization on Bond Market Development
Measures to speed up the pace of nancial liberalization in the dom-

estic market have stemmed from the signicant increase in economic
activities over the past decades. These measures, such as the liberaliza-
tion of interest rates, relaxation of foreign exchange controls and capital
movements, and reforms in nancial markets, have encouraged issuance
of market instruments by domestic enterprises, which have traditionally
relied more on bank loans as their main source of nancing.
III. Overview of the Bond Market
The government bond market in Taipei,China rst appeared in 1949,

when the central government issued the so-called patriot bond to -
nance defense expenditure. Secondary market trading for government
bonds was nearly nonexistent in the early days. In 1962, with the estab-
lishment of the Taiwan Stock Exchange (TSE), government bonds began
to be exchange-traded, but their liquidity was very low. By 1971, the
Government Bond Dealers Association ushered in OTC trading for gov-
ernment bonds and established the so-called two-tier (exchange and OTC)
trading system. With only a short period of interruption, this two-tier
trading system is still the one used in the market today.
Taipei,China is a good example of how a government bond market
can be made to develop in a short time. In order to maintain a healthy
scal position, investments in infrastructure and the social sectors were
limited until the late 1980s. When the central Government embarked on
the National Six-Year Infrastructure Plan in early 1990s, it changed its
scal policy to focus more on the issuance of government bonds as an
alternative funding source, and consequently stimulated the growth of
the government bond market (Figure 5).
The outstanding volume of government bonds in 1987 was only
NT$131 billion, remaining around NT$200 billion until 1991, but by
1999 had swollen almost 10 times, surpassing NT$1.2 trillion (US$38
billion) (Figure 6). This upward trend of borrowing is expected to con-
tinue for at least the near future, since more than NT$400 billion in
bond issuance is already slated for the coming year. Additional borrowing
is also required to cover funding needs due to the damage done by
recent major earthquakes that hit the center and south of the island. As
a percentage of GDP, the amount of government bonds outstanding is
currently at 14 percent (Figure 7), compared to nearly 60 percent in the
US, 110 percent in Japan, 97 percent in Singapore, and 30 percent in
Hong Kong, China. This indicates that the government bond market in
Taipei,China still has plenty of room for further development. However,
current budgetary laws put a cap on the maximum size of government
borrowing and total amount of debt outstanding.
Meanwhile, CBC and MOF have introduced a series of fundamen-
tal reforms that have signicantly opened up the market and improved its
liquidity. For example, the government bond issuance procedure has been
changed from the previous xed-price allocation system to an auction-
based system. Up to November 1999, the new issue volume of government
bonds for scal year 2000 (July 1999December 2000) had reached more
than NT$140 billion.
Overall, government bonds dominate the domestic debt market with
more than 70 percent of the market share, while corporate bonds ac-
count for a quarter of the market, with foreign bonds and nancial
debentures making up the remainder.
However, the corporate bond market has gained rapid momentum
FIGURE 5
New Issue Volume of Domestic Market Debts
(NT$ billion)
300
250
200
NT$ billion
150
100
50
0
91 92 93 94 95 96 97 98 99
Year
Government Corporate Foreign
Source: Bond Market Database, Grand Cathay Securities Corporation.

Taipei,China 617
FIGURE 6
Outstanding Volume of Government Bonds
(NT$ billion)
1,600
1,400
1,200
1,000
NT$ billion
800
600
400
200
0
88 89 90 91 92 93 94 95 96 97 98 99 00
Year
Source: Bond Market Database, Grand Cathay Securities Company.
FIGURE 7
Government Bonds Outstanding as a Percentage of GDP
20
18
Percent
16
14
12
10
91 92 93 94 95 96 97 98 99
Year
Source: Statistical Release from the Central Bank of China.

over the past decade, becoming an important funding source for corporations.
While both government and corporations are seeking low cost funds
in the nancial market, the potential crowding-out e¬ect becomes trouble-
some. Furthermore, some regulations, such as the imposition of transaction
tax on corporate bonds, have put private debt issues at a disadvantage
when competing with government bonds. Although the size of the govern-
ment bond market in Taipei,China overshadows its corporate counterpart,
the balanced development of both deserves serious attention.
For the most part, public and private bond markets can function
complementarily. A well-functioning government bond market can be of
great value to the healthy development of the corporate bond market.
The creation of a risk-free benchmark yield curve, for example, should
facilitate the pricing and valuation of corporate bonds. Unfortunately,
such a benchmark yield curve is not yet well-established in the domes-
tic market.
Since 1998, all new issues of government bonds in Taipei,China
have been switched to the book-entry system, which greatly improves
the markets operational e¹ciency. Still, many obstacles, such as ine¹-
ciency in clearing and settlement, need to be overcome. Recent proposals
to alter the longstanding tax treatment on coupon income have raised
concerns and increased uncertainty in the market. The primary dealer
system, which is of critical importance to a well-functioning government
bond market, also deserves close scrutiny.
A. Secondary Market for Government Bonds
On the surface, the secondary market trading of government bonds

appears well-established, with annual trading volume at around NT$50
trillion (or slightly more than NT$1 trillion per outstanding volume).
However, this high turnover rate is enabled by an immensely popular
repo market. Outright trading (i.e., buy and sell) of government bonds
accounts for less than 15 percent of total transactions, with daily trading
volumes less than 2 percent of outstanding volume (compared to nearly
6 percent in Hong Kong, China and 3 percent in Singapore for example).
Consequently, liquidity (as measured by the outright transaction) of govern-
ment bonds in the domestic market is rather limited.
Lack of liquidity can be attributed to insu¹cient supply of gov-
ernment bonds, the lack of a benchmark yield curve, and the fact that
major investors (e.g., banks) tend to hold government bonds to meet
reserve requirements.
The main purpose of government bond issuance in Taipei,China is
to bridge the gap in the budgetary shortfall. The amount of budget
Taipei,China 619
decit, therefore, dictates the issuing volume. While additional capital

expenditure for infrastructure development in the early 1990s resulted in
an annual issuance volume of over NT$200 billion, the call for a bal-
anced budget and statutory limits on government bond issuance kept
the annual issuance amount to less than NT$150 billion, except in 1997.
To most investors in Taipei,China, such uncertain supply of government
bonds signals scarcity, and fosters a tendency to hold onto them.
Furthermore, holders of government bonds can easily obtain short-
term liquidity from the well-developed repo market, which further
exacerbates the situation of inadequate trading in the market.
B. Corporate Market and Financing Behavior
The rst issue of corporate bonds was in 1958, when TaTung Steel
Corp. oated a NT$15 million straight debt. Strict issuing requirements,
along with other impediments in the market, however, discouraged pri-
vate enterprises from tapping this funding source. Instead, they relied
more on bank loans as a source of funds. This situation started to change
in the early 1990s, following a series of e¬orts by the Government to
liberalize the nancial market. The rapid growth of the economy, a fa-
vorable interest rate environment, and strong investor demand, have resulted
in rms aggressively tapping the corporate bond market. Although small
when compared with its government counterpart, the corporate bond market
in Taipei,China has seen tremendous growth in recent years. The amount
of new issue corporate bonds took a major step forward in 1994, and
even surpassed the issue volume of government bonds in 1998, with the
outstanding volume more than NT$450 billion (US$15 billion) by the
end of 1999.
With an increasing number of borrowers and more complex bond
designs, an issuers credit risk becomes di¹cult to measure, however, seriously
a¬ecting the e¹ciency of both the primary and secondary bond markets.
A crucial requirement in the development of corporate bond mar-
ket in Taipei,China, therefore, is the establishment of credit rating system.
C. Types of Securities
Government Securities. Government bonds can be grouped into four

major categories: (i) infrastructure, (ii) reconstruction, (iii) highway
construction, and (iv) provincial construction. The rst two categories
accounted for more than 95 percent of the total issue outstanding in
July 1999.
The majority of government bonds are coupon securities, which pay
interest either annually or semi-annually. Two issues of discount (zero-coupon)

bonds of three-year tenor each were marketed in 1995, but with lackluster
market acceptance. No future issue of zero-coupon bonds is planned at the
moment.
Table 5 shows the maturity breakdown of new issue government
bonds since 1991. Short- and medium-term government bonds (two- to
seven-years) were issued in the early 1990s, and in an e¬ort to spread
out bond redemption dates and extend bond duration, longer-term gov-
ernment bonds were gradually included, with the rst 10-year government
bond introduced in 1993, followed by the 15-year tenor in 1994. To
extend the Treasury yield curve even further, 20-year government bonds
began to appear in the market in 1998. It should be noted that the
Government does not nance across the yield curve on a regular basis
and the market lacks on-the-run issues for key tenor segments.
TABLE 5
Breakdown by Tenor of New Issue Government Bonds
(NT$ billion)
Year 2-Year 4-Year 5-Year 7-Year 10-Year 15-Year 20-Year Total

1991 20 40 64.5 80 204.5
1992 20 95.0 120 235.0
1993 83 60.0 143.0
1994 55 45.0 20 120.0
1995 30 25.0 45 100.0
1996 35 110.0 100 245.0
1997 30.0 30 30.0 60 150.0
1998 30.0 92.9 122.9
1999 30.0 30.9 80 140.9
Total 20 60 219.5 433 330.9 305 92.9 1,491.0
Figure 8 displays the maturity breakdown of outstanding govern-

ment bonds in the market. The well-spaced maturity range provides a
good basis for establishing a risk-free benchmark yield curve. However,
lack of liquidity in the market, along with other factors, makes pros-
pects for a benchmark yield curve unhopeful.
For short-term funding needs, MOF also issues Treasury bills through
the CBC. These securities have tenors of less than one year and are sold
on a discount basis. Maturities of three months, six months and 270
days are auctioned.
Foreign Bonds and Financial Debentures. The market for foreign bonds
Taipei,China 621
FIGURE 8
Breakdown by Tenor of Outstanding Government Bonds, 1999
(percent of total volume outstanding)
< 15 years < 1 year

8% 10%
10–15 years
< 1–3 years
22%
17%
3–5 years
7–10 years 12%
12%
5–7 years
19%
is just taking shape, its total volume reaching over NT$80 billion (US$2.5
billion) in 1999.
Several supranational borrowers have tapped the domestic bond
market in recent years and spearheaded the capitalization of funding
opportunities. ADB has been the leader in foreign bond issuance in
Taipei,China with a series of Dragon Bond (denominated in US$ and
Japanese yen) in the early 1990s. Since 1995, ADB and other supra-
nationals, including the Central American Bank for Economic Integration
(CABEI), EBRD, Nordic Investment Bank (NIB), Inter-American
Development Bank (IADB) and Council of Europe (COE), have all issued
NT$ bonds in the local market. New issue volume of these foreign bonds
has increased steadily since 1995 and surpassed NT$30 billion in 1998.
So far, there has been no issuance of NT$ bonds in the domestic market
by foreign corporations.
Financial debentures are issued by special-purpose banks to meet
short- to medium-term funding needs. With a limited number of eligible
issuers, these securities have never played any major role in the local
debt market. The nancial debenture has maintained a stable outstand-
ing amount below NT$100 billion over the years.
Figure 9 shows how the size of the government bond market has
expanded signicantly from 1992. The outstanding volume of government
bonds in 1987 was only NT$131, but had swollen almost 10 times to
NT$1.2 trillion (US$38 billion) by 1999. The outstanding volume of
FIGURE 9
Outstanding Volume of Domestic Market Debt
(NT$ billion)
1,600
1,400
1,200
NT$ billion
1,000
800
600
400
200
0
91 92 93 94 95 96 97 98 99 00
Year
Government Foreign Financial Corporate
corporate bonds in Taipei,China had surpassed NT$450 billion (US$15

billion) in the same period. The market for foreign bonds was only just
starting to take shape, however, with total volume reaching more than
NT$80 billion (US$2.5 billion). The nancial debenture has maintained
a stable outstanding amount below NT$100 billion over the years. Over-
all, government bonds dominate the domestic debt market, with over 70
percent of the market share, while corporate bonds account for a quarter
of the market and the other two types the remainder.
D. Investor Base
Commercial banks such as the Bank of Taiwan, Taiwan Coopera-

tive Bank, First Commercial Bank, Hua-Nan Commercial Bank, and Chang
Haw Commercial Bank are traditionally the major investors in govern-
ment bonds in the domestic market, holding more than half of all
outstanding issues. Other big investors are insurance rms and postal
services. These savings institutions hold government bonds mainly to
meet reserve requirements, and therefore have little incentive to trade in
the secondary market. In the secondary market, securities rms and bill
nance companies are the major players, but their trading is limited to a
few on-the-run issues, while a high liquidity premium is often imposed
Taipei,China 623
on o¬-the-run issues. This lack of liquidity hinders the price formation

process for government bonds in Taipei,China.
This means, if commercial banks win a larger portion in a newly
auctioned issue, that particular issue is unlikely to have an active sec-
ond market. On the other hand, benchmark issues in the market are
usually the ones where security rms and bill nance companies have
won most of the bids in the auction.
Individual investors gure largely in the repo market, or through
the Postal Savings System, but rarely participate in outright purchase or
sale activities. Institutional investors such as government pension funds,
retirement funds, and insurance companies do not play an active role in
the government bond market. This can be attributed to the relatively
low yield provided by government bonds, which are essentially quasi
tax-free instruments in the domestic market. Since these institutional
investors are tax-exempt entities, they can obtain better returns simply
by putting their investment dollars in time deposits.
Bond funds are becoming a major player in the capital market, ac-
counting for well over NT$1.5 trillion in capital. However, unlike their
counterparts in other countries, most bond funds put a large share of their
investment dollars into time deposits and repos. Consequently, the per-
centage of outright government bond investment is very low. Contributing
to this investment behavior is the fact that, to facilitate the required daily
calculation of their net asset value (NAV), bond funds must mark to mar-
ket their investment assets. Inactive trading on most o¬-the-run government
bonds, however, fails to provide readily available benchmark prices, thus
making daily marking-to-market operations questionable. This results in
bond funds not being willing to play a serious investment role, further
reducing the liquidity of government bonds.
IV. Bond Market Infrastructure
A. Primary Dealer System
Only institutions with government security dealer or primary dealer

(PD) status, awarded by the Treasury Department of the CBC, are al-
lowed to participate in the primary bond auction. To become a government
securities dealer, institutions (banks, bill nance companies, or integrated
security rms) must rst be qualied by meeting the minimum capital or
net worth level and other requirements. These dealers are expected to
actively participate in every government bond auction, and to provide
two-way quotations to ensure liquidity in the secondary market.
Dealers who do not abide by the rules, or who make bid/ask quotations
that are obviously out of line with the market, can have their dealer
status revoked by CBC. Since the inception of the government bond
dealers system in 1980, however, no dealership status has been revoked.
In fact, the number of dealers has increased from less than 20 to 71 in
1999, more than twice the number of PDs in the US, where the Treasury
market is of much greater size.
Individuals and other institutional investors who wish to par-
ticipate in the primary auction must do so through qualied dealers.
Each dealer can submit 10 competitive bids and one noncompetitive
bid. To ensure reasonable distribution of auctioned bonds in the market;
the total amount of new issue awarded to each government security
dealer cannot exceed a preset level, usually at 30 percent of the auction
amount.
B. Issuance Methods and Procedures
In 1991, the issuance procedure for government bonds was switched

from the previous xed-price allocation system to the auction system.
The new issue auction size of government bonds ranges from NT$10
billion to NT$50 billion, with NT$30 billion as the norm.
Competitive bids are submitted on a price basis, while noncom-
petitive tenders are based on quantity rather than price. Unlike in the
US, where all noncompetitive bids are satised before allocating the rest
to competitive bids, the amount of competitive and noncompetitive al-
location is determined before the auction. A 70/30 allocation is usually
observed for competitive and noncompetitive bids, respectively.
The competitive bidding system used in the auction is the so-
called multiple-price auction system, in which the highest price bidders
are awarded securities at their bid price rst, then lower price bidders are
successively awarded securities at their bid price, until the total amount
of competitive allocation is awarded. A single-price auction system (or
the Dutch auction) was used briey in 1995, when the Government is-
sued zero-coupon bonds. The temporary switch to the Dutch auction
method was to ensure that all zeros were awarded at the same price to
facilitate capital gains calculation at the time of bond redemption.
With the implementation of the book-entry system for government
bonds in 1998, competitive bids are now submitted on a yield basis,
and bids are specied to three decimal places.
Because the issuance of government bonds in Taipei,China is still
done on a need basis, and there is no preset schedule for the bond
issuance, Treasury securities are not o¬ered at regular cycles, although
e¬orts have been made to ensure bond o¬erings at xed intervals. The
Taipei,China 625
maturity and size of each o¬er is usually determined and announced two
weeks prior to the auction.
This lack of issuance regularity increases market uncertainty and
causes market participants to pay undue attention to new issues, height-
ening market yield sensitivity to bond auction announcements.
C. Size, Coupon and Interest Payments
The average size of each government bond auction is around NT$30

billion, regardless of bond maturity. Smaller auction sizes in the past
have resulted in bond issues su¬ering from liquidity problems in the
secondary market.
Until recently, the coupon rate on new issue government bonds
was determined prior to the auction. This was necessary because bond
certicates need to be prepared ahead of time so that delivery can be
made soon after the auction. Since coupon rates were set slightly higher
than the going market rates, government bonds were normally issued at
a premium. With the adoption of the book-entry system in 1998, bond
certicates were no longer required. The bond coupon rate is now deter-
mined at the time of auction, based on average auction rates. Specically,
fractions of a percentage point are quoted in eighths, and the bond
coupon is set at the closest (but not over) rate fraction level. For example,
if the average auction rate is 6.34 percent, then the coupon rate will be
set at 6.25 percent, not 6.38 percent. With this coupon-setting convention,
new issue government bonds since 1998 are all sold with a slight discount.
Coupon payments on most government bonds are made twice a
year, but the current trend has been to cut down the payment frequency
to once a year, while maintaining the semi-annual compounding prac-
tice. In fact, all new bond issues since 1996 have adopted the annual
interest payment schedule. Appendix 2 provides the government bond
auction results from the second half of 1995 to the end of 1999. As can
be seen, the weighted average yields on the new bond issue were lower
than the bond coupon for issues before September 1997, indicating that
government bonds were all sold at a premium. With the introduction of
the book-entry system after September 1997, bond auctions were con-
ducted on a yield basis and coupon rates were set based on the winning
bid yields. Hence, the coupon rates were in line with market interest rate
levels. Appendix 3, on the other hand, shows the auction results of T-bills
from December 1995 to December 1999. These bill issues have various
maturities, from as short as 56 days to almost seven months, and issue
sizes range from NT$5 billion to NT$30 billion.
D. When-Issued Trading
In most countries, WI trading of government bonds constitutes an

integral, and sometimes indispensable, part of the bond auction process,
as it can lessen the uncertainty surrounding Treasury auctions. Under
current security transaction regulations in Taipei,China, however, WI trading
is not technically permitted in the domestic market, meaning the market
cannot benet from these trading activities.
WI trading of government bonds did appear among government
bond dealers in 1993, however, despite being strictly speaking at odds
with the existing security trading laws. Allowing bond dealers to take
views on the upcoming auction, it provides risk hedging and price dis-
covery functions (bond futures are not yet available in Taipei,China).
WI trading starts soon after a new issue of bond auction is announced
and lasts until the auction day. A WI bond is quoted on yield basis
between new issue announcement and bond auction, since traders do
not know the coupon rate. So far, only major government bond dealers
participate in the WI market, and the trading volume is relatively low,
averaging less than 5 percent of the auction amount.
E. Secondary Trading Systems
Government bonds are cross-listed on the TSE and OTC market,

although almost all trading activity occurs OTC. Figure 10 shows the
annual turnover of government bonds.
Trading hours are Monday to Friday, from 0900 to 1500 hours, but
most trading occurs in the morning session. Two-way quotations are
provided by active traders and can be found on the Reuters screen.
Quotations, made on a yield basis, are for a single transaction with a
nominal principal value of NT$50 million. Trading amounts other than
NT$50 million require price negotiation. The bid/o¬er spread for gov-
ernment bonds is typically in the range of 510 bps.
Computer-assisted trading systems for government bonds are avail-
able in both the TSE and OTC, but neither has successfully fullled the
purposes they were designed for. Daily transactions are still done by
telephone. With an increasing number of bond dealers in the market,
this puts a heavy burden on the communication system and reduces
trading e¹ciency, especially when dealers need to cut or build a large
position. Another disadvantage of negotiated trading practices is that
price quotations and details of a matched deal cannot be revealed in
good time, thus reducing price transparency in the market (several major
bond dealers now do post bid/ask quotations on the Reuters system).
Taipei,China 627
FIGURE 10
Annual Turnover of Government Bonds
(NT$ billion)
70,000
60,000
50,000
NT$ billion
40,000
30,000
20,000
10,000
0
89 90 91 92 93 94 95 96 97 98 99
Year
F. Repo Market
Government bonds are used predominantly in the repo market for

at least two reasons. First, they account for well over 70 percent of the
outstanding volume of the straight bond market and second, corporate
bond trading incurs a 0.1 percent transaction tax, which discourages
trading. Supranational foreign bonds although, like government bonds,
exempt from transaction tax, are held mostly by long-term investors and
seldom traded in the market. Insu¹cient supply of government bonds
has been blamed for the lack of outright trading activities. Investors in
government bonds tend not to sell the bond outright since the repo
market can provide su¹cient short-term liquidity in case of need.
Meanwhile, the di¬erential tax treatment between institutions and
individuals means individual investors, who are taxed on a cash basis,
can hold bonds between coupon payment dates and sell them back to
securities rms, who are charged on an accrual basis, and thus hold the
bonds on the coupon payment date. Consequently, individual investors
essentially receive tax-free income through repo transactions, while security
rms obtain low cost of funds to nance the security purchase. This
depresses the government bond yield curve to an estimated 75100 bps.
Market Participants. Major participants in the repo market are securities

rms, accounting for about 60 percent of transactions. Bill nance
companies are a distant second, taking up about 23 percent of the market
share, and banks and other institutions account for the rest. There are
about 20 active traders in the market and approximately 80 percent of
the total trading volume is handled by the top ve market makers, Grand
Cathay Securities Corp., President Securities Corp., China Bills Finance
Corp., Chinatrust Commercial Banks, and Capital Securities Corp.
G. Other Aspects
1. Benchmark Yield Curve
The outstanding amount of government bonds in the domestic market

has reached more than NT$1.2 trillion, with tenors spread evenly across the
maturity spectrum. With active trading of the outstanding volume, a bench-
mark yield curve could easily be established. However, the quality of govern-
ment bond yield curve in the domestic market leaves a lot to be desired.
The new issue auction size of government bonds ranges from NT$10
billion to NT$50 billion, with NT$30 billion as the norm. However,
when commercial banks win the majority of a new issue in an auction,
they tend to hold the bonds for reserve requirements, and the remaining
outstanding volume becomes too small to support a liquid market. With
a small outstanding volume, price manipulation becomes more likely
and market yields lose their benchmarking role.
Another problem is the excess yield spread between on- and o¬-
the-run issues. This can sometimes be quite signicant; 25 bps or even
higher is not uncommon, whereas 1015 bps is normally observed in
other markets. Since building a complete benchmark yield curve requires
yield information on both on- and o¬-the-run issues, large yield spreads
make constructing a smooth curve more di¹cult, consequently reducing
its benchmarking function in the market.
2. Tax Treatment
Trading of government bonds in the secondary market is exempt

from taxation, whereas corporate bonds and other nancial debentures
are subject to a transaction tax of 0.1 percent, whether outright buying
or selling, or a repo transaction. This di¬erential tax treatment puts cor-
porate bonds at a disadvantage, since the transaction tax deters secondary
market activities. Supranational foreign bonds are largely free of transaction
tax, but this privilege is granted on a case-by-case basis.
Taipei,China 629
Tax inequality breeds arbitrage activities, which in turn create price

distortions in the market. However, MOF has drafted a bill to exempt
corporate and nancial bonds from transaction tax, in order to smooth
the issuance and circulation of corporate bonds, as well as to stimulate
medium to long-term funding for the private sector.
Further distortion is created in yield through current tax laws, which
require the calculation of the amount of taxable coupon income from
bond investment to be based on the coupon rate and the face value of
the bond, regardless of whether the bond was purchased at a premium or
discount. Consequently, the taxable basis for discount bonds investment
is higher, whereas the basis for premium bonds is lower.
Coupon income for individual investors is taxed on a cash basis,
i.e., taxable in the year when coupon payments are actually received.
For institutional investors, on the other hand, it is based on an accrual
basis, i.e., based on the coupon income earned during the holding pe-
riod in a taxable year. This creates an incentive for tax arbitrage, in
which individuals sell bonds to institutional investors such as brokerage
houses right before the coupon day and repurchase them right after. In
this way, individuals incur no coupon income, and institutional inves-
tors pay taxes only on the coupon earned during the interim holding
period. This explains the uniquely high volume of repo transactions in
the domestic bond market, and also results in depressed yields in gov-
ernment bonds, since they are practically tax-free for individual investors.
3. Credit Ranking
Until recently, investors in the domestic market have largely based

their bond investment decisions on subjective criteria, such as a borrowers
name and reputation. With an increasing number of borrowers and more
complex bond designs, an issuers credit risk becomes di¹cult to mea-
sure. Practitioners have long raised concerns about credit spread in the
domestic market being distorted, which seriously a¬ects the e¹ciency
of both the primary and secondary bond markets.
A major step forward in the development of the corporate bond
market is thus the establishment of credit rating system. Taiwan Rating
Corporation (TRC) was established in 1997 and is the islands rst credit
rating service. The company is a joint venture between Standard & Poors
and a number of domestic institutions led by TSE. The rating agency
provides credit ratings to the domestic market so that investors, lenders,
and other interested parties can gain clear benchmarks to judge credit
strength. Currently, all issuers of nonguaranteed bonds must obtain
credit ratings before issuance. Financial guarantors such as banks must
also obtain credit ratings before providing such a service. Bond funds
are required to invest in nancial institutions with a minimum level of
credit ratings.
4. Clearing and Settlement
Settlement of government bond transactions occurs within three

days after the transaction date. Normally, the seller species the exact
date and place where the settlement and physical delivery of scripts are
to occur. Although funds for repo transactions are transferred through
electronic funds transfer, proceeds for outright transactions are normally
through bank-issued checks drawn on the Bank of Taiwan. In fact, the
Bank of Taiwan has become a de facto standard as a settlement interme-
diary due to its popular use by market participants in the domestic market.
With the book-entry system implemented in 1998 by the Taiwan
Securities Central Depository (TSCD), a centralized system under CBC,
scriptless securities are now cleared through more than 10 clearing banks
as part of the clearing framework. Currently, payments are transferred
through the CIFS which works electronically, and can be on either a
real-time or designated-time basis, the latter settled on a net basis at the
end of each business day. To reduce settlement risks and establish sys-
tems that meet international standards, CBC is restructuring the CIFS to
abolish designated-time settlement and make RTGS the only settlement
mode. In the near future, RTGS will also provide the framework for
merging the Book-Entry Central Government Bonds System (BECGBS)
with the delivery versus payment system (DvP).
V. Regulatory Structure
The Government provides a favorable regulatory framework for the

development of the domestic debt market. The main regulatory authori-
ties include CBC, MOF, and SFC, which oversee market participants
who trade in government bonds.
The issuance of public debt, including government bonds and bills,
is governed by the Codes of Public Debt. The total amount of public
debt for all levels of government cannot exceed 48 percent of average
nominal GNP of the previous three years. This puts an upper limit on
the amount of government bonds that can be issued in any given year.
To provide adjustment for treasury ow of funds, the Government can
issue T-bills with a maturity of less than 364 days. The amount of out-
standing bills, however, cannot exceed 50 percent of the central
Government annual budget for the scal year.
Taipei,China 631
CBC imposes reserve requirements on deposits and other liabilities

of commercial banks that are regulated by the Banking Law of the Re-
public of China. There are maximum limits for the reserve ratio for various
deposit accounts, within which CBC can make necessary adjustments.
CBC can also keep reserves for indemnity deposited by investment and
trust companies. Since government bonds are generally used to meet
liquid reserve requirements, they are in high demand by these institu-
tions, and commercial banks are the major (and long-term) holders of
government bonds in the domestic market. Appendix 4 shows the trend
of required reserve ratios set by CBC for various accounts.
Participants of primary auctions of government bonds are restricted
to PDs, who must apply and be awarded such status by the Treasury
Department of CBC. Government bond dealers must participate in every
government bond auction, make reasonable bids in the auction based on
the then market conditions, and provide two-way quotations in the sec-
ondary market. Dealers who do not abide by the rules, or who make bid/
ask quotations that are obviously out of line with the market, can have
their dealer status revoked by CBC. Since the inception of the govern-
ment bond dealers system in 1980, however, no dealership status has
been revoked, and the number of dealers has increased from less than 20
to 71 in 1999.
VI. Major Policy Issues and Recommendations
The Government has long recognized the importance of a well-

functioning bond market, and serious e¬orts have been made to improve
e¹ciency.
The regulatory environment for government bonds is generally sup-
portive, and market development is consistent with government scal
and monetary policies, although certain rules and regulations are be-
coming somewhat obsolete and unsuitable for future developments. In
order to give government decision makers a solid base for formulating
policies to develop the bond market, the following means of overcom-
ing these impediments are proposed:
A Regular, Predictable Schedule for O¬ering Government Bonds.

Although e¬orts have been made by government authorities to make
auction announcements to market participants as far in advance as is
practical, irregularity of bond o¬ering is still a major source of uncer-
tainty, and has a signicant inuence on market yield. The Government
should release updated estimates of its borrowing requirements periodi-
cally to allow market participants to estimate more accurately the sizes
of Treasury o¬erings. A regular, predictable o¬ering schedule should

help reduce the Governments borrowing costs, as has happened in many
countries, such as the US.
One foreseeable problem of a regular o¬ering schedule is that, under
current budgetary laws, the total amount of government borrowing is
capped by the annual budget. Furthermore, since the issuance of govern-
ment bonds is mainly for decit funding, the amount of issuance may
actually decrease in future with budget surpluses. It is therefore neces-
sary for the Government to rethink the role of government bonds in the
development of the domestic debt market. For example, although Hong
Kong, China and Singapore have traditionally enjoyed budget surpluses,
both have a regular government bond issuance program, which aims to
establish a benchmark yield curve in the market.
Bond Reopening. Participants in the domestic bond market trade only

on-the-run issues of government bonds. When these bonds are held mainly
by commercial banks or insurance rms for reserve purposes, only a
small portion of the outstanding volume is available for secondary trad-
ing. Limited supply results in undesirable trading practices and distortion
of market prices. Bond reopening increases the outstanding volume of
an existing bond issue in the market, enhancing its market liquidity and
reducing the chance of cornering and price manipulation. This can also
extend the shelf life of on-the-run issues in the market and provide
better benchmark yield information.
Some technical issues need to be ironed out before a bond reopen-
ing program can be implemented, however. For example, a reopened
issue must have the same maturity date and coupon rate as the existing
bond issue. Under the current multiple-price sealed-bid auction system,
those conditions may not be met.
Bond Auction Technique. When the Government changed its bond is-
suance method from xed-price allocation to public auction in 1991,
the sealed-bid multiple-price system was adopted for all new issues of
government bonds. The single-price or Dutch auction system was used
only in the cases of two zero-coupon bonds issued in late 1984. Under
the single-price auction, all awards are at the highest yield of accepted
tenders, hence the single price. The use of the Dutch auction system in
those two situations was to ensure that only a single winning yield
existed for the bond issue, allowing calculation of coupon income for
the zero coupon bonds to be done without confusion.
Various studies have examined the merits of di¬erent auction systems,
and it is argued that a good bond auction system can achieve many
Taipei,China 633
desirable goals such as funding cost reduction. The US Treasury experi-

mented with single-price auctions for the monthly sales of two- and
ve-year notes in September 1992 (multiple-price auctions were the pre-
vailing method used in the US at that time). Based on the US study
released in 1995, and a follow-up study in 1998, there are several ad-
vantages to single-price auctions. They result in a broader distribution
of auction awards, and bring consistency to auction procedures and tech-
niques. Single-price auction participants also tend to bid more aggressively.
Consequently, the US Treasury has applied the use of single-price auc-
tions to the sale of all marketable Treasury securities since November
1998.
The Government should therefore reexamine its existing auction
system. A more e¹cient system can help to improve operational e¹-
ciency in the primary market and spillover into the overall bond market.
Forward Trading and Bond Lending. To broaden the size and depth
of the government bond market, a proper hedging mechanism must be in
place, or traders will be forced to act more defensively and conserva-
tively, and market development will su¬er. Unfortunately, interest rate
forward and bond futures, used for hedging purposes, are not yet avail-
able in the domestic market, partly due to the lack of a benchmark yield
curve. More specically, traders can act on their bull market view by
margin trading, but cannot e¬ectively react when expecting a bear mar-
ket, because short-selling is prohibited. Consequently, bond dealers are
actually exposed to high interest rate risk with no e¬ective hedging
instruments.
As an alternative, a delayed-settlement trading system can be es-
tablished to provide the needed function before bond derivatives are
available. This o¬ers the risk-hedging function needed by market par-
ticipants, and allows traders to conduct futures-like transactions. This
would require only minimal changes in current rules and regulations.
Market makers need only provide quotations for various distant settle-
ment dates. Since this is only one step from cash market trading, some
additional risks arise. For example, the extended settlement period increases
the chance of default on both parties. This risk, however, can be minimized
by margin requirements. Another type of risk is the lack of availability
of bonds at times of settlement. This is where a bond lending mechanism
is needed. A well-functioning bond lending system can e¬ectively broaden
the scope of delayed-settlement trading as mentioned above, and thus
facilitate risk hedging. Bond lending a¬ords traders with no, or insu¹cient,
holdings to participate without fear of potential settlement di¹culties.
Since banks, postal services, and insurance companies own the majority
of government bonds in the market, they are natural candidates for the
role of bond lenders, allowing bond dealers to borrow bonds through
reverse repos.
In short, forward-trading can stimulate secondary market activities,
a¬ord bond dealers more exibility in hedging interest rate risks, and
reduce the chance of price distortion in the market. More importantly, it
can strengthen the market-making function of major bond dealers, al-
lowing them to provide more competitive bid-ask quotations, and thus
attracting more investors into the market and further facilitating the price
formation process.
Bond Futures. Trading of bond futures should contribute signicantly

to the establishment of a benchmark yield curve. The existence of a
derivatives market ensures that cash market prices stay within the no-
arbitrage range, preventing price distortions, and making cash prices
more e¹cient. Physical delivery of bond futures contracts, along with
the cheapest-to-delivery (CTD) conventions, should e¬ectively wake-
up many o¬-the-run government bonds which are no longer actively
traded in the domestic market. This is because the CTD design allows
sellers of bond futures to select a wide range of bonds for delivery,
henceall other things being equalbonds with high yields (low price)
will be in demand and thus encourage trading. This will bring the mar-
ket prices of on- and o¬-the-run issues more in line with each other,
enabling the reduction of the wide liquidity spread currently observed
in the domestic bond market and facilitating the establishment of a bench-
mark yield curve.
Electronic Trading System. There is no doubt that an electronic or

computer-based system improves trading e¹ciency, because it allows
on-line risk management and real-time dissemination of trading informa-
tion, which is vital in order to establish a benchmark yield curve. While
both the TSE and OTC have electronic bond trading systems in place,
they are not embraced eagerly by traders in the market. The OTC has
recently overhauled its existing computerized trading system to make it
more accommodating of market trading conventions. This was expected
to provide a much-needed boost to trading e¹ciency in the market when
it was put into use in Spring 2000.
Clearing and Settlement. Currently, trading on all book-entry govern-

ment bonds is cleared and settled through a RTGS system to prevent
settlement risk. The current system, however, still has room for improve-
ment. Many market participants have voiced support for a netting system
Taipei,China 635
to better facilitate secondary market transaction. Netting can be bene-

cial for the following reasons:
First, it can reduce settlement cost. Under gross settlement, each
transaction must be settled separately. For example, a bond dealer with
15 transactions in a trading day with another dealer requires the same
number of settlement actions under the gross settlement system, while
only a single action is needed under netting, signicantly reducing costs
and improving settlement e¹ciency.
Second, netting can reduce traders reliance on credit lines. For
small bond dealers, gross settlement puts a heavy burden on their ability
to obtain su¹cient credit to support transactions, making it more di¹-
cult for them to increase their trading volume. Under the netting system,
however, a dealers total trading volume can be made more exible, as
long as the netting amount is within the credit limit.
Third, it can prevent settlement loop situations. In any normal trading
day, a settlement loop can easily occur. In a settlement loop, Trader A
sells a bond to Trader B, who resells it to Trader C. Later, Trader C sells
the bond to Trader A and nally Trader A sells it to Trader D. In the
gross settlement process, the same bond is needed in two separate trans-
actions, thus creating a looping problem. With netting this can be avoided.
Coupon Taxation. Di¬erential treatment of coupon taxation between

individual and institutional investors encourages tax arbitrage in the
repo market and results in a depressed repo rate and government bond
yields. Although this reduces the Governments fund costs, it is o¬set by
reduced tax revenue. Furthermore, subsidized government funding cost
creates an uneven playing eld for other borrowers and exacerbates the
crowding-out e¬ect. Meanwhile, major institutional investors such as
pension funds, insurance companies, and bond funds are discouraged by
the distorted low yields, and become inactive in the domestic bond
market, contributing to low bond market liquidity. The Government is
fully aware of the situation and is proposing legislation to eliminate the
incentive for tax arbitrage.
According to one estimate, with the outstanding amount of bonds
in the market standing at around NT$1.6 trillion (over NT$1 trillion in
government bonds), and an average duration around ve years, a 100-bp
increase in yield would cause a value reduction of more than NT$80
billion. On the other hand, tax revenue increase would be much lower at
about NT$50 billion. Care must also be taken, however, to reduce the
possible negative impact of the new taxation rule on government bonds
already outstanding. Separate taxation can e¬ectively curtail the tax
arbitrage activities which currently prevail in the repo market, and alleviate
the price distortion problem in the government bond market. However, it

is suggested that the new rule be nonretroactive, that is, applicable only
to newly issued government bonds, so that the existing equilibrium in
the market can be maintained.
On the issue of the taxable basis of coupon income, current regulations
are biased toward premium bonds in the market, since the calculation of
taxable coupon is based on the bond coupon rate. To eliminate this
potential bias, coupon income can be calculated on a yield basis, that
is, based on the purchased yield to maturity.
When-Issued Trading. The Government should consider revising the

related security trading laws to allow or even encourage WI trading of
government bonds. Not only does WI trading provide an important price
discovery function, it also provides valuable risk hedging functions to
government bond dealers entering the auction. Potential problems asso-
ciated with WI trading, such as short squeeze, can be easily prevented
with careful rules and regulations.
Book Entry System. Issuing government bonds and bills in book-en-

try form not only eliminates the printing of physical certicates, but
streamlines issuance procedures and lowers government funding costs. It
improves the trading e¹ciency of government bonds because the deliv-
ery of bond scripts can be done through electronic transfer, with no fear
of loss, theft, or forgery. Since the introduction of the book-entry system
in 1998, scriptless securities have dominated outright trading in the
market with more than 80 percent of market share. The Government has
taken measures to encourage conversion of script bonds into book-entry
form to further improve bond market e¹ciency and enhance secondary
marker liquidity.
A number of problems need to be addressed before the market can
fully embrace the scriptless environment, however. For example, the cur-
rent information system supporting the book-entry system can accommodate
only one repo transaction per day, which discourages the use of book-
entry securities in the repo market. Furthermore, the clearing procedure
may have di¹culty handling same-day buy/sell transactions.
Another concern of most investors is that the identity of bondhold-
ers will be recorded, which will have tax consequences that do not exist
when using physical certicates. Consequently, investors demand a pre-
mium on book-entry government bonds, and the conversion of existing
bonds to scriptless form has met with resistance. Finally, the Govern-
ment can encourage conversion by giving book-entry government securities
high priority in OMO in meeting the liquid reserve requirements.
Taipei,China 637
Appendix 1
Guidelines for Formulation and Management of Fiscal Policies
Guidelines for Treasury Management
1. Coordination of scal policies to support economic developments;

2. Strengthening of public debt management to raise funds for national construction;
3. Utilization of revenue and expenditure information to e¬ectively manage national
treasury funds;
4. Establishment of a users charge system to promote the fairness of the national
taxation burden; and
5. Improvement of treasury administration to e¬ectively manage national treasury
funds.
Guidelines for Tax Administration
A. Improvement of the Tax System
1. To improve the income tax system by proposing a tax system that aims to
eliminate double taxation, and by combining the prot-seeking enterprise income
tax with the individual consolidated income tax; and
2. To continuously review tax laws and regulations so as to improve the equity
of the tax burden.
B. Strengthening of the Tax Administration
1. To continuously adopt measures to curb tax evasion so as to increase tax

compliance;
2. To continuously implement tax administration automation systems to upgrade
e¹ciency; and
3. To reinforce the systems of tax auditing and supervision for the prevention of
illegal cases.
Guidelines for Customs Service
1. Revise the Customs Laws and Regulations to improve customs clearance

procedure;
2. Continuously review tari¬ rates and optimize their structure;
3. Improve duty collection and antismuggling measures;
4. Streamline customs organization and make its personnel system more sound;
5. Gradually abolish the refund system and improve the administration of bonded goods;
6. Strengthen the enforcement of the countervailing duty and antidumping duty
system; and
7. Enhance the internationalization of customs administration and take part in
international activities.
Guidelines for Monetary Administration
1. Promote nancial liberalization and internationalization;

2. Fulll nancial systematization and modernization;
3. Promote the development of nancial institutions other than commercial banks,
to expand their business scope and diversify their services; and
4. Strengthen banking examination and supervision to maintain nancial discipline.
Guidelines for Insurance Administration
1. Review all insurance laws and regulations so that the functions of insurance
can be strengthened and market order maintained;
2. Oversee insurance companies in developing new insurance products;
3. Review insurance rates and insurance policy clauses to promote liberalization; and
4. Enforce the functions of insurance inspection and ensure the well-rounded
development of insurance enterprises for the protection of the insured public.
Guidelines for Securities Administration
1. To enlarge the scale of the securities market;

2. To publicize nancial information of publicly listed companies;
3. To update the laws and regulations of securities administration;
4. To strengthen the supervision of CPA;
5. To strengthen the surveillance and inspection of illegal transactions;
6. To strengthen the supervision and administration of securities-related services;
7. To continue promoting securities market liberalization and internationalization;
8. To strengthen the education of investors and the cultivation of professionals;
9. To establish a sound foreign futures trading system to set up the domestic
futures market; and
10. To enhance cooperation among competent authorities through the participation
of international organizations or through bilateral consultations.
Guidelines for National Property Management
1. To continue acquiring and registering national land;

2. To continue carrying out the program of national land investigation;
3. To lease national land not for public use to conform to the program of
national land investigation;
4. To cautiously sell national land not for public use to meet national policy;
5. To strengthen the handling of illegally occupied national land not for public use;
6. To review the utilization of large properties in urban areas;
7. To continue planning development of national land;
8. To amend relevant regulations to conform to the revision of the National
Property Act;
9. To expand computerization of national property operations;
10. To improve service to the public.
Taipei,China 639
Appendix 2
Treasury Bond Auction Results (1995/71999/12)
(NT$ hundred million, percent per annum)
Weighted
Non- Coupon Average
Issue Issue Maturity Issue Competitive competitive Rate Yield
Code Date (year) Amount Amount Amount (percent) (percent)
A85401 1995.07.21 15 100 70.0 30.0 7.750 6.554

A85305 1995.08.25 15 100 70.0 30.0 7.600 6.487
A85306 1995.09.22 15 100 70.0 30.0 7.350 6.827
A85101 1995.10.20 3 100 100.0 (Zero *8,403.33 5.970
Coupon)
A85102 1995.11.24 3 200 200.0 (Zero *8,330.01 6.280
Coupon)
A85103 1995.12.22 7 200 140.0 60.0 7.250 6.323
A85307 1996.01.19 10 150 105.0 45.0 7.300 6.266
A85402 1996.03.22 15 150 105.0 45.0 7.300 6.487
A85308 1996.04.26 10 100 70.0 30.0 7.200 6.166
A85104 1996.06.18 7 100 70.0 30.0 7.000 5.788
Subtotal 1,300
A86309 1996.08.23 15 300 210.0 90.0 7.100 6.172
A86101 1996.09.24 10 300 210.0 90.0 6.900 5.654
A86102 1996.10.22 10 300 210.0 90.0 6.800 5.697
A86103 1996.11.19 7 350 245.0 105.0 6.600 5.777
A86104 1996.12.20 10 500 350.0 150.0 6.800 6.251
A86310 1997.01.21 15 400 280.0 120.0 6.900 6.265
A86403 1997.03.11 15 300 210.0 90.0 6.900 6.336
Subtotal 2,450
A87101 1997.09.23 10 300 210.0 90.0 6.375 6.447
A87102 1997.11.21 5 300 210.0 90.0 6.125 6.126
A87103 1997.12.19 15 300 210.0 90.0 6.875 6.980
A87201 1998.02.20 15 300 210.0 90.0 6.875 6.893
A87104 1998.03.17 7 300 210.0 90.0 6.250 6.336
Subtotal 1,500
A88101 1998.09.25 10 300 210.0 90.0 5.125 5.176
A88102 1998.11.24 20 300 210.0 90.0 5.500 5.605
A88103 1999.01.22 20 269 189.0 80.0 5.250 5.319
A88201 1999.04.23 20 360 252.0 108.0 5.875 5.917
Subtotal 1,229
A89101 1999.07.23 5 300.0 210.0 90.0 5.875 5.957
A89102 1999.08.20 10 309.2 189.2 120.0 6.250 6.276
A89103 1999.09.28 15 400.0 280.0 120.0 6.125 6.173
A89104 1999.10.15 15 400.0 280.0 120.0 6.125 6.239
A89105 1999.11.23 10 400.0 280.0 120.0 5.875 5.932
A89106 1999.12.17 10 390.0 273.0 117.0 6.000 6.007
Subtotal 2,199.2
*Price of NT$10 thousand unit of par value.

Appendix 3
Treasury Bill Auction Results (1995/121999/12)
(NT$100 million, percent per annum)
Weighted
Issue Issue Maturity Issue Average
Code Date (Day) Amount Discount Rate
(percent)
T85201 1995.12.28 112 50 5.970
T85202 1996.01.13 91 100 5.370
T85203 1996.01.26 112 86.5 6.863
T85204 1996.03.14 182 100 7.033
T85205 1996.06.13 56 100 4.940
Subtotal 436.5
T86201 1996.07.13 91 150 5.070
T86202 1996.07.17 91 150 5.087
T86203 1996.08.07 112 150 5.200
T86204 1996.10.16 182 150 5.122
T86205 1997.06.18 91 150 5.845
T86206 1997.06.25 112 0
Subtotal 750
T87201 1997.07.10 91 0
T87202 1997.07.16 91 118.5 6.882
T87203 1997.07.23 126 104.7 7.152
T87204 1997.12.12 140 200 7.676
Subtotal 423.2
T88201 1998.12.18 91 300 4.741
T88202 1998.12.28 112 250 5.145
T88203 1999.01.15 112 200 4.719
T88204 1999.01.29 126 200 4.970
T88205 1999.03.15 119 250 4.632
T88206 1999.03.29 140 100 4.811
T88207 1999.04.15 154 300 4.945
T88208 1999.06.21 147 250 4.944
T88209 1999.06.28 182 150 4.947
Subtotal 2,000
T89201 1999.07.09 182 300 5.044
T89202 1999.07.14 91 200 4.830
T89203 1999.09.15 182 300 5.120
T89204 1999.11.11 182 300 4.931
T89205 1999.12.13 182 300 4.910
T89206 1999.12.24 210 300 4.935
Subtotal 1,700
Taipei,China 641
Appendix 4
Required Reserve Ratios of Deposits and Trust Funds, 19911999
(percent of deposits)
Checking Passbook Passbook Time Time

E¬ective Date Account Account Savings Savings Deposit
9/11/91 27.75 25.75 18.25 10.00 12.000

9/21/91 27.75 25.75 18.25 9.250 11.250
11/18/91 27.25 25.25 17.75 9.250 11.250
1/9/92 27.25 25.25 17.75 8.875 10.875
7/17/93 26.25 24.25 16.75 8.125 10.125
8/12/95 25.25 23.25 15.75 7.625 9.625
9/25/95 24.25 22.25 14.75 7.125 9.125
11/7/95 23.75 21.75 14.25 6.875 8.875
3/8/96 22.50 20.50 13.00 6.525 8.525
8/24/96 22.00 20.00 12.50 6.400 8.400
9/25/97 21.25 19.25 11.75 6.250 8.250
10/16/97 19.75 17.75 10.25 5.750 7.750
8/3/98 19.25 17.25 9.75 5.550 7.550
9/29/98 18.75 16.75 9.25 5.350 7.350
2/20/99 15.00 13.00 5.50 5.000 7.000

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602 Government Bond Market Development in Asia

In the aftermath of Asian nancial crisis, bearish equity markets

The rapid growth of the local economy, along with a favorable

price allocation. Short- and medium-term government bonds (two- to

predictable schedule for o¬ering government bonds; (ii) bond reopening

I. Fiscal Policy and Management

MOF enforces national scal policies. It is charged with maintain-

status; (iii) improvement of tax structure to promote economic develop-

The main source of government income in Taipei,China is taxes

Source 1987 1996

At all levels of government, expenditure for national defense, edu-

Expenditure 1987 1996

Economic Development 25.9 13.2

Since 1989, the decit increased due to expenditure on reserve

C. Financing of Fiscal Decits

The Government has switched from its traditional goal of main-

Source: Statistical Releases, MOF.

Source: Statistical Releases, MOF.

expansionary scal policies, such as the National Development Plan

1991 1992 1993 1994 1995 1996 1997 1998 1999

A mount 713 455 395 360 305 165 106 55 59

Source: Central Bank of China reports.

Tax Relief. To promote economic development and encourage exports, the

Tax Reduction/Exemption Tax Rebate for Export Total Tax Relief

1990 5.6 0.7 6.3

Source: MOF reports.

To accelerate industrial development and better accommodate

Development Fund. To upgrade the industrial structure of the nation,

E. Liberalization and World Trade Organization Accession

The liberalization of the nancial market has also been a major

II. Monetary Policy and Management

The CBC is the highest monetary authority in Taipei,China and

A. Monetary Policy Tools

The CBCs main policy instruments include open market opera-

Source: Central Bank of China Financial Statistics Monthly.

certicates of deposits (NCDs) to adjust liquidity in the market and pro-

of capital for domestic rms and improved the competitiveness of do-

Source: Central Bank of China Financial Statistics Monthly.

B. Foreign Exchange Rate Policy

Taipei,China has adopted a oating exchange rate regime since

C. Impact of Liberalization on Bond Market Development

Measures to speed up the pace of nancial liberalization in the dom-

III. Overview of the Bond Market

The government bond market in Taipei,China rst appeared in 1949,

Government Corporate Foreign

Source: Bond Market Database, Grand Cathay Securities Corporation.

Source: Bond Market Database, Grand Cathay Securities Company.

Source: Statistical Release from the Central Bank of China.

A. Secondary Market for Government Bonds

On the surface, the secondary market trading of government bonds

decit, therefore, dictates the issuing volume. While additional capital

B. Corporate Market and Financing Behavior

Government Securities. Government bonds can be grouped into four

interest either annually or semi-annually. Two issues of discount (zero-coupon)

Year 2-Year 4-Year 5-Year 7-Year 10-Year 15-Year 20-Year Total

Source: Bond Market Database, Grand Cathay Securities Corporation.

Figure 8 displays the maturity breakdown of outstanding govern-

< 15 years < 1 year

Source: Bond Market Database, Grand Cathay Securities Corporation.

Government Foreign Financial Corporate

Source: Bond Market Database, Grand Cathay Securities Corporation.

corporate bonds in Taipei,China had surpassed NT$450 billion (US$15

Commercial banks such as the Bank of Taiwan, Taiwan Coopera-

on o¬-the-run issues. This lack of liquidity hinders the price formation

In the aftermath of Asian nancial crisis, bearish equity markets

MOF enforces national scal policies. It is charged with maintain-

Since 1989, the decit increased due to expenditure on reserve

C. Financing of Fiscal Decits

expansionary scal policies, such as the National Development Plan

The liberalization of the nancial market has also been a major

The CBCs main policy instruments include open market opera-

certicates of deposits (NCDs) to adjust liquidity in the market and pro-

of capital for domestic rms and improved the competitiveness of do-

Taipei,China has adopted a oating exchange rate regime since

Measures to speed up the pace of nancial liberalization in the dom-

The government bond market in Taipei,China rst appeared in 1949,

decit, therefore, dictates the issuing volume. While additional capital

Bond Futures. Trading of bond futures should contribute signicantly

to better facilitate secondary market transaction. Netting can be bene-

1. Coordination of scal policies to support economic developments;

1. Promote nancial liberalization and internationalization;