China Sells $79 Billion Bonds to Set Up Reserves Fund

China Sells $79 Billion Bonds to Set Up Reserves Fund

http://www.bloomberg.com/apps/news?pid=20601087&sid=aipttdSgQnsk&refer=home

By Belinda Cao

Aug. 29 (Bloomberg) -- China sold 600 billion yuan ($79 billion) of bonds to the central bank in the nation's biggest debt sale, providing funds for a state agency that will invest part of the world's largest currency reserves.

The Ministry of Finance sold the first part of a 1.55 trillion yuan special issue of 10-year bonds at a coupon of 4.3 percent, according to the Web site of the government's biggest debt-clearing house. The central bank will hold the debt before selling it gradually into the nation's bond market.

China is setting up the world's biggest state-owned investment company to seek higher returns on its $1.33 trillion of foreign-exchange reserves, diversifying from U.S. Treasuries. The sale will also help the central bank drain cash from the economy, after inflation reached a 10-year high of 5.6 percent in July.

``China should already be buying assets with higher returns with its reserves so this is the natural next step,'' said Hu Hangyu, a Beijing-based fixed-income analyst at Citic Securities Co., Asia's biggest brokerage by market value. ``This won't affect bonds because it's not sold to the market.''

Chinese investors held $405 billion, or 18 percent of foreign-held U.S. Treasuries at the end of June, second only to those from Japan. A company representing the planned agency in May bought $3 billion of shares of Blackstone Group LP, a New York-based private-equity firm.

The yield on China's three-year government bond fell 3.4 basis points to 3.39 percent at 1:03 p.m. in Shanghai, according to China Interbank Bond Market. The price of the 3.53 percent security due July 2010 advanced 0.092 yuan per 100 yuan face amount to 100.36 yuan. The yield on 10-year bonds, which haven't traded today, was 4.20 percent yesterday.

Worst Performers

Government bonds dropped 1.88 percent this year, the worst performance among 10 local-currency debt markets in Asia outside of Japan tracked by an index of HSBC Holding Plc. Investors sold debt as stocks rallied, inflation accelerated and the government approved the record debt sale in June.

The CSI 300 Index, which tracks yuan-denominated A shares listed on China's two exchanges, lost 85.89, or 1.6 percent, to 5,165.88. The measure added 14 percent in the previous seven days trading, closing at a record yesterday. The yuan was little changed at 7.553 per dollar.

``The special bond will be used as one of the instruments in open-market operations,'' Su Ning, deputy governor of the People's Bank of China, said at a press conference in Beijing.

Disappointing Investments

A record trade surplus has pushed China's reserves to an all-time high, flooding the banking system with excess cash and spurring lending. The central bank has raised interest rates four times and the deposit reserve ratio six times this year to help mop up the funds.

The special bond will ``partly replace'' central bank bills as an instrument to absorb liquidity and cool the overheating economy, Li Yang, head of finance research at the Chinese Academy of Social Sciences in Beijing, said in June.

Investors have been concerned that the size of the special bond issue, which is more than half of the 3 trillion yuan government debt market, would drive down prices.

The sale is the biggest since the China Central Government Debt Depository & Clearing Co. started collating data in 1998. The announcement was posted on the clearing house's Chinabond.com Web site. The Ministry of Finance plans to issue a statement today.

The 1.55 trillion yuan issue was approved by lawmakers in June. The investment company will officially start business in September, Shanghai-based China Business News reported on Aug. 14. The Agricultural Bank of China acted as an intermediary to get around a legal barrier stating the central bank is not permitted to directly purchase government debt.

Blackstone's shares have fallen since it listed and were 20 percent lower on Aug. 9, when Market News International reported that the investment was a disappointment, citing an unnamed government official.