August 28, 2017 / 2:34 AM / a year ago

China to roll over 600 bln yuan of special Treasury bonds

HONG KONG, Aug 28 (IFR) - China is preparing to roll over a massive 600 billion yuan ($90 billion) of special Treasury bonds this week in a carefully choreographed operation designed to minimise impact on its stressed money market.

The unusual sale is a belated consequence of the way the country’s sovereign wealth fund, China Investment Corp, was set up 10 years ago. At the time, the central government issued 1.55 trillion yuan of special Treasury bonds in order to capitalise the fund. The first of these bonds are now coming due.

The refinancing comes amid another severe liquidity crunch in the domestic bond market, sparking worries that the enormous amount of supply will make matters worse.

Those concerns were eased, however, after the Ministry of Finance (MoF) confirmed that the bonds would be privately placed to a group of banks, with the People’s Bank of China (PBOC) as the ultimate investor, rather than being offered in the public market.

The MoF said last Tuesday that it would place 3.60 percent seven and 3.62 percent 10-year notes with designated banks on August 29 to refinance the maturing 600 billion yuan 4.3 percent 10-year special bonds.

The central bank will then buy all the bonds on the same day from the lenders involved.

“The market had worried the MoF might opt for a more market-based approach, selling notes via auction to a broader set of market participants, and that this would soak up liquidity,” said a Shanghai-based rates trader. “The clarification reassured the market that the impact would be almost zero.”

The rollover was announced just as the domestic market experienced another liquidity squeeze. Short-term money rates jumped to their highest in nearly five months last Wednesday, as the PBOC kept up the pressure on financial institutions to scale back speculative forms of financing. The benchmark 14-day repo traded in the interbank market hit 4.4476 percent last Wednesday, the highest since March 31.

The PBOC said in a statement that the rollover of the special Treasury bonds would not crowd out the primary or secondary market and would not affect liquidity in the banking sector.

The special bonds arrangement was put in place as a way to capitalise CIC in 2007 without funding it directly from the country’s foreign reserves.

Instead, the MoF raised 1.55 trillion yuan via eight bond offerings at initial yields of 4.30 percent to 4.69 percent and used the proceeds to purchase $200 billion of foreign exchange reserves from the PBOC. The $200 billion were then injected into CIC as capital.

Out of total proceeds, 1.35 trillion yuan was first bought by Agricultural Bank of China and then passed on to the PBOC, as the central bank is not allowed to buy Treasury bonds from the primary market. The other 200 billion yuan were sold to commercial banks via public offerings.

The 600 billion yuan of special bonds coming due this week are the first of the eight to mature.

The MoF did not disclose which banks would buy the special bonds. However, market participants expect several major players to be enlisted in the exercise.

Despite all the careful preparations, the plan may still have affected market liquidity, some observers reckon.

“Recently, large banks were seen to be very cautious in lending money as some of them needed to put aside more provisions in order to subscribe to the special bonds,” said Cao Hao, a senior researcher with China Chief Economist Forum, a think tank. (Reporting by Ina Zhou; Editing by Vincent Baby) )

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