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China starts selling $79 bn in bonds to finance state investment agency

China starts selling $79 bn in bonds to finance state investment agency

Beijing, 29 August China began selling 600 billion yuan (US$79 billion; Rs3,24,516 crore) of bonds today to finance a state body that will invest the country’s foreign currency reserves, Xinhua News Agency reported.

China is setting up the agency, tentatively called the State Investment Co., in an effort to make more profitable use of its $1.2 trillion in reserves, which now are kept mostly in US Treasury securities and other safe but low-yielding securities.

Analysts have said the investment company, which is still in preparation and would report directly to China’s cabinet, would manage as much as $200-400 billion (euro150-300 billion), making it one of the world’s richest investment funds.

Chinese officials say the investment agency is modeled in part on Singapore’s state-owned Temasek Holdings, which invests in banks, real estate, shipping, energy and other industries in Singapore, India, China, South Korea and elsewhere.

Xinhua reported that the bond sale was the first tranche of a 1.55 trillion yuan (US$199 billion; euro146 billion) basket of special treasury bonds. China’s legislature in late June approved a plan for Beijing to sell the 1.55 trillion yuan in bonds to buy foreign exchange to fund the investment agency.

Xinhua quoted the China Securities Journal as saying that the annual interest rate of the bonds would be about 4.3%, basically matching the market rate for long-term debt.

The report said the maturity for the bonds would be 10 years and 15 years.

“The government plans to launch a state forex investment company to make better use of the country’s huge foreign exchange reserves," Xinhua said.

The investment company, made its first investment in May in non-voting shares, valued at $3 billion), in the Blackstone Group, suffering losses as the US private equity firm’s stock dropped.

The government says it wants to make more profitable use of its reserves, up to 70% of which are thought to be in safe but low-yield Treasuries and other US dollar-denominated assets. Much of the rest is believed to be invested in euros and a small amount in yen.

The growth in China’s reserves has been driven by its surging exports, which bring in a flood of foreign currency. That’s forcing the central bank to drain billions of dollars a month from the economy by selling bonds to reduce pressure for prices to rise. The reserves are growing by about $20 billion (euro15 billion) a month.

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