China's Ministry of Finance said on Wednesday it would use all the forex purchased with returns from a 600 billion-yuan (67.79 billion U.S. dollars) special treasury bond sale to finance the China Investment Co. Ltd.
The ministry began to sell the 10-year bonds at a coupon of 4.3 percent in the inter-bank market on Wednesday, said a statement of the ministry.
The bond sale was in the first tranche of 1.55 trillion yuan basket of special treasury bonds, the rest of which would be sold with a maturity of 15 years or longer, said an official with the ministry.
He said the ministry could adopt open-market operations to purchase forex through bond sales by selling the bonds to commercial banks which would later sell them to the central bank.
According to the official, the central bank would sell an amount of forex equivalent to 600 million yuan in order to buy the special treasury bonds from commercial banks.
The bond sale would "help curb excess liquidity, coordinate financial and monetary policies, reduce the size of forex reserves and increase returns on the reserves," he said.
Market observers held that the interest rate for the 35 billion yuan of central bank bills issued on Tuesday was fairly high at 3.3165 percent, raising the cost for the central bank to call back excessive liquidity, and this month was a peak period for maturing central bank bills.
They said the central bank very likely would replace maturing bills with the newly issued bonds, which would have little impact on market liquidity.
The government plans to launch a state forex investment company to make better use of the country's huge foreign exchange reserve. The forex investment company, still in preparation, made its first investment in non-voting shares, valued at three billion U.S. dollars, in the U.S. private equity firm, the Blackstone Group.
China's legislature approved the special issuance of 1.55 trillion yuan treasury bonds for the investment company in June.
A spokesman for the Ministry of Finance said the issuance of the bonds would not directly affect money supply in the market.
China's forex reserve had reached 1.33 trillion U.S. dollars by the end of June. CPI reached a 10-year high of 5.6 percent in July.
Chinese share prices ended their weeklong surge on Wednesday, with the benchmark Shanghai Composite Index closing at 5,109.43 points, down 85.26 points or 1.64 percent, from the previous close.
China's currency, the yuan, on Wednesday hit a new high against the U.S. dollar for the second consecutive day after more than one month of downward adjustment, according to the Chinese Foreign Exchange Trading System.
The central parity rate of the yuan stood at 7.5505 yuan to one U.S. dollar on Wednesday, gaining 40 basis points from Tuesday's reference rate of 7.5545 to the greenback. The accumulative appreciation since July 21, 2005, when China discontinued yuan's peg to the greenback, had reached 9.557 percent.
The bond sale could mean that the planned state investment company, which had been called "state forex investment company", would start operation soon.
Liang Hong, chief economist with Goldman Sachs (Asia) China, said the special issuance would not have direct impact on market liquidity and interest rates.
The central bank had raised interest rates four times this year to help control fast credit growth and curb the hovering risks of inflation.
(Xinhua News Agency August 30, 2007)
