Banks to reenter exchange-traded fund market

By Sun Zhe

Three major State-owned banks were approved to invest in exchange-traded funds by the China Banking Regulatory Commission (CBRC) Thursday.

The applications of Bank of Communications and China Construction Bank have also been approved by the Shanghai Stock Exchange, while that of the Industrial and Commercial Bank of China is still pending.

The banks need approval from the stock exchanges themselves in addition to permission from the regulator.

Banks were banned from the listed bond market in 1997 when the Asian Financial Crisis triggered concern that the financial institutions were causing a bubble on the stock market.

The restriction helped build a protective firewall between the interbank bond market and the exchange-traded bond market, according to Mei Jun, a researcher at Beijing-based People's University of China.

Banks were then restricted to the interbank bond market, which was set up mainly for State-owned enterprises and government institutions.

The China Securities Regulatory Commission and the CBRC said earlier this year that a test run would be started for the country's 14 domestically listed banks to invest exchange-traded bonds, according to the Wall Street Journal.

The exchange bond market would not be very attractive for banks in the short term, as the market is much smaller than the interbank bond market, said Zhu Xiaodong, a Beijing-based finance analyst.

"It may take years for the market to grow large enough," said Zhu, "although more companies would become more interested due to the reentry of the banks."

The bond-trading volume on China's interbank market totaled 40.8 trillion yuan ($5.98 trillion) in the first nine months of the year, while the volume on the country's two stock exchanges was merely 393 billion yuan ($57.6 billion).

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