China may issue $203.49b special T-bonds to buy forex

Updated: 2007-06-27 13:36

The Ministry of Finance plans to sell 1.55 trillion yuan ($203.49 billion) of bonds to buy foreign-exchange reserves that will be managed by a new investment fund, Xinhua News Agency reported.

The ministry is setting up the State Investment Co that will purchase a portion of the country's record $1.2 trillion foreign-exchange reserves from the central bank to seek higher returns in global markets. The bonds will mature in more than 10 years, Xinhua said today without elaborating.

The sale will add to the supply of China's bonds, which slumped 2.7 percent this year.

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"It is not clear yet if the bonds will be sold to all investors or only certain targeted institutions," said Li Gang, a fixed-income trader at the Agricultural Bank of China, one of the nation's four-largest lenders. "If sold to the market, it will definitely push up bond yields."

China's outstanding bonds, including government debt, central bank bills and corporate bonds, reached 10 trillion yuan at the end of May, according to the government-run Chinabond Web site. Lou Jiwei, a former vice minister at China's finance ministry, was appointed this year to start up the new investment fund.

Soaking up 1.55 trillion yuan from the system has the same effect as raising China's reserve requirement ratio 10 times with a magnitude of 0.5 percent each, Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong, wrote in an e-mailed report.

The bond sale is also aimed at reducing excess funds in the financial system, said Li Yang, who heads financial research at the Chinese Academy of Social Science, at a forum on June 20. This type of bond issue is more efficient at absorbing excess cash from financial institutions than central bank's bills and will substitute for the latter, he said.

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