China sold 600 billion yuan ($79 billion) of bonds in the nation’s biggest debt sale to fund a new company that will invest foreign exchange reserves.
The ministry of finance sold the 10-year bonds to the People’s Bank of China at a coupon of 4.3%, according to the website of the government’s biggest debt-clearing house.
China is setting up the world’s biggest state-owned investment company to seek higher returns on its $1.33 trillion of currency reserves, after cutting US treasury holdings in the second quarter.
The new fund bought a $3 billion stake in New York-based Blackstone Group LP. in May, suffering losses as the private equity firm’s stock dropped.
“It’s not an easy job for the government to do overseas investment now, given the recent turmoil on the global equity markets,” said Wang Zheng, who manages the equivalent of $500 million at the asset management unit of Everbright Securities Co. Ltd in Shanghai. “That’s not a good time to enter an area that is unfamiliar to them.”
Chinese investors held $405 billion, or 18% of foreign-held US treasuries at the end of June, second only to those from Japan. Blackstone’s shares, bought by a company on behalf of the planned fund, have fallen 26% since it listed on 22 June.
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. China’s central bank will gradually sell the debt in the market to drain cash from the banking system.
Inflation reached a 10-year high of 5.6% in July, while the economy grew at an 11.9% pace in the second quarter.
The yield on China’s three-year government bond fell three basis points to 3.39% in Shanghai, according to China Interbank Bond Market.
The price of the 3.53% 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 on Wednesday, was 4.20% on Tuesday.
“The bond market will feel the impact of the special issue gradually as the central bank will use it mainly as a tool to absorb liquidity,” said Lu Wenlei, an analyst with Shenyin & Wanguo Securities Co., Ltd in Shanghai. Lu said the central bank will reduce issuance of bills to make room for the new debt.
Government bonds dropped 1.88% 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 prepared for the record debt sale.
The CSI 300 Index, which tracks yuan shares on China’s two exchanges, lost 1.5% to 5,172.82. The measure added 14% in the previous seven days trading, closing at a record on Tuesday. The yuan was little changed at 7.5545 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.
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 this year to help mop up the funds.
The sale is the biggest since the China Central Government Debt Depository & Clearing Co. started collating data in 1998.
The announcement was posted on its Chinabond.com website. The ministry of finance was scheduled to issue a statement on Wednesday.
The investment company will officially start business in September, Shanghai-based China Business News reported on 14 August.
Lou Jiwei, a former vice-minister at China’s finance ministry, was appointed this year to start up the new company.
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.
“The company will have to make a higher return than that on the reserves managed by the central bank,” said Sun Mingchun, an economist at Lehman Brothers Holdings Inc. in Hong Kong. “To achieve this goal, it may have to diversify its investments into higher-yielding assets such as pension funds.” Bloomberg
Shidong Zheng in Shanghai and Christina Soon in Beijing contributed to this story.