600b yuan bond issue starts off investment body
Analysts see no impact on liquidity
The Ministry of Finance sold 600 billion yuan of special treasury bonds to the central bank yesterday, taking a concrete step to starting the China Investment Corp, a state-owned vehicle for overseas investments.
The ministry offered a yield of 4.3 per cent for the 10-year bonds, charts released yesterday by the China Central Government Debt Depository & Clearing showed. The interest rate was similar to the 4.23 per cent of the corresponding treasury bonds.
The bonds were labelled as tradable only on the interbank market. Analysts said the issue would not have any impact on money supply and market liquidity. 'It's absolutely neutral. No money enters the market, so nothing has changed at all,' said Yang Hui, a bond researcher at Citic Securities.
The finance ministry is also widely expected to sell another 200 billion yuan worth of special bonds to the retail market, but the timetable remains unclear.
The special bonds were issued yesterday to the central bank through the Agricultural Bank of China. As an unlisted commercial bank, it has no duty to release related transactions to the public.
Through the third party, the central bank avoids violating a law that prohibits it from buying bonds directly from the ministry.
The central bank would inject the same amount of foreign exchange reserves into the CIC, whose establishment was authorised by the National People's Congress in June to invest a portion of the country's US$1.33 trillion foreign reserves in more profitable assets than low-yielding US treasury bonds.
The CIC might also invest in state-owned firms to help them spread business to overseas markets, an earlier ministry news release said.
Media reports said the ministry would eventually issue 1.55 trillion yuan worth of special bonds with maturities of 10 to 15 years. Those bonds would replace some three-year bank bills issued by the central bank as a tool to prevent commercial banks from having too much money to spend.
The central bank deputy governor, Yi Gang, told Shanghai Securities News on Tuesday the bank's distribution of those bonds would lead to 'moderate tightening' and not cause dramatic market changes.
'Even selling 200 billion yuan in bonds to the retail market at a time only equals a 0.75 increase in the deposit reserve ratio and would not scare anybody,' Citic Securities' Mr Yang said.
Standard Chartered economist Stephen Green said moderate tightening alone would not soak up enough liquidity. He said the central bank might further increase interest rates within the year to help the special bonds absorb excess liquidity.
A Goldman Sachs research note said neither the setting up of the CIC nor the issuance of special bonds would change the inflow of foreign exchange. 'The fundamental policy challenge remains unchanged for the central bank: how to conduct independent monetary policy in a very open economy with a significantly undervalued currency,' it said.
More to come
Special 10 to 15-year bonds worth 1.55 trillion yuan are planned
The yield offered by the Ministry of Finance for the 10-year bonds 4.3%