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China sells $79 billion in bonds
2007-08-30
China began selling $79 billion in bonds Wednesday to finance a state agency that will invest the country's foreign currency reserves, Xinhua News Agency reported. Analysts say the state investment company, which would report directly to China's cabinet, would manage as much as $200 billion to 400 billion, making it one of the world's richest investment funds. China is setting up the agency, tentatively called the State Investment Co., to make more profitable use of its $1.2 trillion in reserves, which now are kept mostly in U.S. Treasury securities and other safe but low-yielding securities. 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. The investment vehicle has already made one investment, valued at $3 billion, in the U.S. private equity investor Blackstone Group. That investment has not panned out, as Blackstone shares have plummeted 34 percent since an initial public offering in June. Xinhua reported that the 600 billion yuan bond sale was the first tranche of a 1.55 trillion yuan ($199 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 percent, basically matching the market rate for long-term debt. "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 government says it wants to make more profitable use of its reserves, up to 70 percent of which are thought to be in safe but low-yield Treasuries and other U.S. 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 a month from the economy by selling bonds to reduce pressure for prices to rise. The reserves are growing by about $20 billion a month.
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