China to finance state investment company

China's Ministry of Finance said yesterday it would use all the forex purchased with returns from a 600 billion-yuan (US$67.79 billion) 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 yesterday, 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 US$3 billion, in the US 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 US$1.33 trillion by the end of June. CPI reached a 10-year high of 5.6 percent in July.