Insurers key to bankrolling assets agency

PUBLISHED : Tuesday, 10 July, 2007, 12:00am
UPDATED : Tuesday, 10 July, 2007, 12:00am

Beijing reveals blueprint on how it will sell 1.55 trillion yuan bond

The mainland has signalled for the first time it would use some of the country's cash-rich financial giants, including China Life Insurance and Ping An Insurance Group, to help bankroll the country's huge new state investment firm.

Shares of China Life and Ping An Insurance, the nation's two largest insurers, surged yesterday after the China Business News reported they would be the chief purchasers of the government's 1.55 trillion yuan special bond issue.

The bonds will pay for the purchase of US$200 billion of foreign exchange reserves from the central bank to fund the mainland's new international investment vehicle.

The mainland, whose foreign exchange reserves are the biggest in the world, wants to invest part of its money in higher-return assets to avoid losses caused by a weaker US dollar.

Analysts say the corporation might also lift the global profile of mainland firms, emulating organisations such as the Government of Singapore Investment Corp.

Contradicting earlier reports that the bonds initially would be bought by the central bank, the Ministry of Finance said it would sell the debt to a number of commercial financial institutions, the newspaper reported.

Cash-rich insurers such as China Life are seeking new ways to invest amid concern that the advance in the stock market has peaked.

Selling the bonds to commercial institutions could have the added benefit of draining excess liquidity from the supercharged stock market, amid growing concern that the world's fastest-growing major economy is overheating.

'Issuing the bonds directly to the PBC would be easier because it would have a zero impact on the market,' said Michael Pettis, a professor of finance at Peking University.

'But selling the bonds into the market is preferable because it would have a positive impact on excess liquidity.'

China Life rose 5.4 per cent to close the session at 44.12 yuan in Shanghai while its Hong Kong shares climbed 6.26 per cent to HK$30.55 yesterday.

Ping An gained 3.5 per cent to 75.35 yuan in Shanghai and advanced 3.42 per cent in Hong Kong.

Taikang Life Insurance and New China Life Insurance could also take part in the bond sale along with an unspecified number of other financial institutions, the newspaper reported, citing a source at the Ministry of Finance.

A number of mainland experts including Li Yang, the head of the China Academy of Social Sciences' finance research institute, have indicated the bonds would be sold to intermediary financial institutions as banking regulations forbid the central bank from buying government securities directly.

The newspaper further named the Agricultural Bank of China as a possible investor.

The bank could use its unlisted status to buy low-yielding government bonds without having to answer to shareholders.

'Financial institutions are normally reluctant to hold long-term, fixed-rate bonds because current rates are too low,' said Mr Pettis. 'But there are signs that interest rates may rise which would give a greater yield to the bonds.'

Although investors in China Life and Ping An reacted positively, other investors fear the bond issuance would drain off liquidity that would otherwise have been channelled into the stock market.