Learn mandarin - Special bond issue won't seriously impact liquidity

BIZCHINA / Center

Special bond issue won't seriously impact liquidity

By Shangguan Zhoudong (chinadaily.com.cn)
Updated: 2007-07-02 11:33

Chinese lawmakers last Friday approved the Ministry of Finance to issue
1.55 trillion yuan (US$202 billion) in special bonds, aiming to help the
central bank handle excessive liquidity. But analysts branded the issue a
kind of "moderate" policy and said it won't pull massive funds out of the
market, China Business News reported.

Insiders said that the ministry will issue the special bonds to the
central bank to finance the purchase of foreign exchange reserves for the
fledging State Forex Investment Company.

They said the whole operation becomes an exercise in accounting,
essentially shifting a portion of foreign exchange reserves from the
central bank's balance sheet to the state investment company's. There
would be little impact on domestic liquidity.

The ministry also said that it will sell these special bonds in a gradual
process to regulate money supply so as to keep the market stable.

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Even if the central bank would sell off these special bonds to financial
institutions directly to take the money back, the bonds will be released
in tranches to keep the market stable, the insiders said.

A source with the ministry also said that the market shows increasing
demands for investment in treasury bonds, with the expanding gap between
interest rates of deposit and lending as well as the growing number of
investment channels of insurance and social securities funds. The issue
of these special bonds will help to meet demands.

Issuing the special bonds to the central bank will have a moderate impact
on the market compared with issuing them directly to financial
institutions, according to Lu Zhengwei, a researcher with the Industrial
Bank.

"The central bank will sell the special bonds to mop up liquidity, but
the frequency and amount depend on the money supply target and other
market situations including the maturity of central bank notes," Lu said.

Peng Xingyun, a financial expert at the Chinese Academy of Social
Sciences, said that getting forex reserves through such means similar to
asset swap won't impact the liquidity but can regulate the assets of the
ministry and the central bank in a short time.

Data show that the central bank issued 3.6 trillion yuan in central bank
notes last year. Up to now this year, the total central bank notes issued
have reached 2.5 trillion yuan.

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