The national legislature yesterday debated a draft bill
authorizing the Ministry of Finance (MOF) to sell 1.55 trillion
yuan (US$200 billion) of special treasury bonds to finance the
proposed foreign exchange investment company.
The funds raised will be used to buy US$200 billion of the
country's total of US$1.2 trillion foreign exchange reserves from
the central bank, and invested overseas.
The bill, submitted by the State Council to the National
People's Congress (NPC) Standing Committee, is expected to be
approved.
The government decided earlier this year to establish a
sovereign wealth management fund to dilute its whopping foreign
exchange reserves.
Minister of Finance Jin Renqing yesterday told lawmakers that the
issue - the country's biggest - will help "reduce the size of
China's forex reserves" and "improve the returns on forex
assets".
According to official figures, by the end of March, forex
reserves had reached US$1.202 trillion, up US$135.7 billion from
the end of 2006.
Explaining the massive scale of the issue, Jin said China's
forex reserves were likely to continue to rise, and the central
bank will face more pressure in coping with excessive liquidity
even after recent measures to reduce currency in circulation.
The bonds will help domestic enterprises do business abroad and
enhance national economic competitiveness, Jin said.
Details of the issue, such as whether the bonds will be issued
directly to the central bank or sold in the domestic market, are
not available.
Analysts agree the US$200 billion bonds would be long-term and
issued in tranches with the interest rate expected to be in line
with market levels.
"The news is obviously encouraging for the international
market," said Chen Xingdong, chief economist of BNP Paribas
Peregrine Securities. "The money may be used (overseas) to buy
blue-chip companies or for mergers and acquisitions."
For the domestic market, however, it could have a negative
impact, he told China Daily.
"Although within market expectations, it is still bad news as it
will divert a huge amount of money from the domestic market."
Analysts said the central bank and the MOF must coordinate
carefully to avoid adverse effects on the money market.
"The central bank would have to work closely with the MOF on
this, otherwise money market rates could go haywire," said Stephen
Green, chief economist with Standard Chartered Bank (China). "We
expect the central bank to draw back on its own bill issuance
program... allowing the authorities to issue the special
bonds."
The State foreign exchange company, still in an embryonic stage,
has already spent US$3 billion for a 10 percent stake in
Blackstone, a US private equity group.
This is seen as a sign of change from the previous strategy of
investing most of the foreign exchange reserves in safe US
treasuries.
Since the market situation is changing, it is normal for China
to invest some of its reserves in riskier but more profitable
portfolios, said Zhao Xijun, finance professor at Renmin University
of China.
(China Daily June 28, 2007)