"Problems in competition in the commercial bills market have drawn the attention of senior central bank officials," said Qin Chijiang, deputy secretary-general of China Society of Finance.

Qin, also a senior adviser to the People's Bank of China, added that the central bank may hopefully consider drawing further regulations to ensure the sound development of the market.

A most urgent task, Qin said, is a much-discussed revision of the Commercial Bills Law, promulgated in 1995, to add financing functions as another legal role of commercial bills besides settlement, and the drafting of related trading rules.

The use of commercial bills in China is undergoing an expansion, partly as a result of the central bank's policies encouraging the use of such money market instruments as promissory notes, bank drafts and cheques, as well as the growing awareness among businesses of the advantages of the low-cost financing method.

Outstanding financing through commercial bills more than doubled on a year-on-year basis to 916.3 billion yuan (US$110 billion) at the end of June, according to the central bank.

But a narrow scope of products and competition for clients have caused many banks, especially smaller joint-stock commercial banks, to cut discount rates, bringing yields to very low levels.

"The result of competition is just cutting rates," said a senior manager at a major Chinese bank. "And now it's a matter of who has the sufficient funds to withstand (the low rates)."

He said some smaller banks had cut their discount rates below the central bank's rediscount rate, which largely measures the cost in rediscounting at the central bank.

And interbank discount rates had, at some points in the past weeks, dipped below interest rates on interbank loans, which the manager said was unusual.

Joint-stock commercial banks are, increasingly frequently, designing new discount products that alleviate business needs for loans, helping themselves draw clients away from the big State-owned commercial banks with their low costs.

The manager, who preferred to remain anonymous, said such practices are detrimental to the development of the market as the sagging yield serves only to discourage more banks from entering the market.

"There should be, instead, new products designed for financing functions," he said. "Or the disorderly competition will just get worse."

(China Daily July 17, 2003)