Aug. 29 (Bloomberg) -- China sold 600 billion yuan ($79 billion) of bonds, the most ever, to fund a company that will help invest the world's biggest foreign-exchange reserves. The Ministry of Finance sold the 10-year bonds to the central bank at a coupon of 4.3 percent, according to the Web site of the government's biggest debt-clearing house...
...Lawmakers approved a special issue of 1.55 trillion yuan in debt for the new fund in June, which is more than half the size of the 3 trillion yuan government debt market. The People's Bank of China will gradually sell the debt into the market to drain cash from the banking system. Inflation reached a 10-year high of 5.6 percent in July, while the economy grew at an 11.9 percent pace in the second quarter.
The yield on China's three-year government bond fell 3 basis points to 3.39 percent as of 5:30 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.
I am puzzled that the MoF sold the bonds directly to the PBoC because I understood that, in order to protect PBoC independence, the PBoC's charter did not permit it to buy primary government issues. Guess I was wrong.
However I am glad that these bonds are now part of the PBoC tool box. The PBoC is supposedly planning to sell the bonds into the market as part of its open market operations. I have never believed that anything as liquid and as short-term as the central bank bills they usually use to manage the money supply had much impact. Central banks bills are too close a substitute for money to be of much use in reducing the money supply.
These new, long-dated MoF bonds are likely to be a much weaker subsitute for money, so that the gradual sale of the new MoF bonds by the PBoC should have a bigger impact on reducing underlying liquidity. The trick is whether the PBoC will be allowed to sell them at whatever is the market clearing price. The government is generally seen as determined to control interest rates directly, so it is unclear whether they will allow long-term interst rates to rise to whatever level the market demands.
Alternatively, they may sell them simply by instructing commercial banks (or insurance companies) to buy them at whatever the PBoC determines to be the "right" price.
You were right on the use of an intermediary bank. MOF sold the bond to an unspecified commercial bank (raising RMB) then PBoC simultaneously bought them from the commercial bank.
Blink and you could have missed it, as Bloomberg apparently did.
MOF explains all here: http://www.mof.gov.cn/news/20070829_1500_27510.htm
By Mark Williams - 8/29/2007 1:15 AM
Thanks Mark. There were very strong rumors in the market last week that the intermediary would be Agricultural Bank of China. I understood that in order for the trade to meet the charter requirements an intermediary bank would have to hold the paper for some period of time -- I want to say one or two weeks, but I don't remember.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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Comments (2) for "RMB 600 billion bond issue"
November, 2007
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