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Beijing may sell T-bonds to foreigners


CHINA'S Ministry of Finance is considering proposals to issue 3.5 billion yuan (about HK$4.7 billion) of its troubled domestic bond issue to a syndicate of foreign banks.

The issue is likely to be lead-managed by United States investment house Goldman Sachs, with September 1 being considered as the date to launch the syndication.

Ministry of Finance officials last week held meetings with financiers to discuss arrangements for the bond issue.

It is also understood that Goldman Sachs met with the People's Bank of China over the country's credit ratings.

If it goes ahead, it will be the first time international investors have bought Chinese treasury bonds since 1949, when the newly installed Communist government reneged on obligations to bonds issued by the nationalist Kuomintang.

''Sovereign risk is not a factor any more, but international bankers are worried about the currency risk associated with these bonds,'' said one source in Beijing. He added that the annual yield was attractive by international standards for treasury bonds.

''The Government cannot make any commitment on the level of the exchange rate. The risks are there, but so are the yields,'' he said. The five-year bonds have a coupon rate of 15.86 per cent.

A spokesman for Goldman Sachs in New York refused comment yesterday.

A Hong Kong banker said: ''I have got a whole stack of Chinese Government bonds on my wall, their nominal value is now below their value as collector's items. They are beautiful prints.'' He said the cancellation of the pre-1949 bonds was no longer a problem. ''Investment bankers don't care what their fathers sold. They are interested in what deals they can do now.

''However, the reception to new bonds right now might be lukewarm. The yuan is perceived to be 20 to 40 per cent overvalued if it were allowed to float free.

''If you want to put it in US dollars that is one thing, but if you want to put it in yuan, I really can't quantify the risk.'' On July 14, Moody's assigned China International Trust and Investment Corporation (CITIC) a Baaa1 rating for a proposed Yankee bond issue.

As CITIC's external borrowings are guaranteed by China, it is in fact a de facto rating for government debt.

A number of regional organisations, such as Guangdong International Trust and Investment Corp have floated bonds overseas since 1986, but there have been no central government issues available to foreign buyers.

The international syndication would account for 11.67 per cent of this year's 30 billion yuan government bond issue. The issue has flopped in China where even the high yields have not been sufficient to match inflation.

The government badly needs funds to pay for the grain harvest and infrastructure projects, but the original deadline was extended when only four billion yuan of the total had been sold by May 1, the original deadline.

The government also twice raised the interest rate to make it more acceptable.

Sales remained sluggish until the Government finally set bond quotas for each province and city, and barred them from approving any other bond or stock issues until the quota was met.

Workers in some cities were forced to accept bonds instead of salary.

Earlier this month, the Industrial and Commercial Bank of China lead-managed a syndicate of mainland banks, taking up a two-billion yuan tranche of the treasury bond issue.

The issue was coordinated by the Stock Exchange Executive Council. Co-lead managers were China Securities, CITIC, China Southern Securities and China Everbright International Trust and Investment Co.