Rollover of 600bn Yuan in Special Treasury Bonds Won’t Impact Liquidity: PBOC

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The People’s Bank of China says that the rollover of 600 billion yuan in special treasury bonds will not have a material impact upon market liquidity.

The Ministry of Commerce announced on 22 August that the State Council had approved the rollover of 600 billion yuan in special treasury bonds set to mature on 29 August.

MOFCOM will issue 400 billion yuan in special treasury bonds with maturities of 7 years to relevant banks via private placement, alongside a further 200 billion yuan in 10-year special treasury bonds.

Subsequent to MOFCOM’s announcement Xu Zhong, the head of the People’s Bank of China’s research department, said that the rollover would not have an impact upon liquidity in China’s finance or banking systems.

Market observers had previously expressed concern that the rollover of 600 billion yuan in special treasuries issued a decade ago would have an adverse impact upon the availability of funds if they were they were issued via open market auction.

MOFCOM has since indicated in its “Notice Concerning Arrangements in Relation to 2017 Special treasury Bonds (Lot 1 and Lot 2) Issuance Work” that the method of issuance employed for the issuance of the first lot of bonds in 2007 will be used, with a private placement first made to certain domestic banks including the Agricultural Bank of China on 29 August.

The first lot will consist of 7-year bonds with a face value of 400 billion yuan and a coupon  rate of 3.6%, while the second lot will consist of 10 year bonds with an face value of 200 billion yuan and a coupon rate of 3.62%.

The two lots will offset the maturation of 600 billion yuan in special treasury bonds slated to mature at the end of the month.

According to Xu the re-use of the 2007 method of issuance for the original lot of treasury bonds means that MOFCOM will first make a direct placement with designated banks, before the central bank purchases them on the secondary market.

Article 29 of the “People’s Republic of China People’s Bank of China Law” stipulates that PBOC cannot provide overdrafts to the Chinese government or directly purchase or underwrite government bonds.

For this reason Xu argues that there will be no “squeezing out” effect on China’s primary or secondary bond markets, and that the rollover will not change total government debt, the balance sheet of the central bank, or the balance sheets of relevant financial institutions.

PBOC has placed heavy emphasis upon the maintenance of “stable, neutral monetary policy” in 2017, amidst efforts by regulators to deleverage China’s financial system, while also maintaining sufficient liquidity for actors in the real economy.

2007 saw the issuance of approximately 1.55 trillion yuan (USD$207.91) in ten-year special treasury bonds to provide long-term capital for newly established sovereign wealth fund China Investment Corporation  (CIC).

At that time MOFCOM first issued the Agricultural Bank of China with 600 billion yuan in special treasury bonds to raise RMB funds, before then using the amount to purchase the equivalent sum of foreign exchange from PBOC.

Simultaneous to this, PBOC used the 600 billion yuan it obtained from the sale of foreign exchange to the central government to purchase the equivalent value of special treasury bonds.

600 billion yuan of these bonds are slated to mature on 29 August, prompting analysts to speculate on the likely response from the Chinese government and its potential impact on liquidity, given that out of the 1.55 trillion yuan in special treasury bonds outstanding, approximately 1.35 billion yuan are held by China’s central bank.

As of the end of July the Chinese central bank’s “creditor’s rights with respect to the government” consisted of 1.53 trillion yuan in government bonds, accounting for 4.36% of the People’s Bank of China’s total assets.

Lianhe Securites chief macro-economic researcher Li Qilin said to 21st Century Business Herald that the market had previously expressed concern about the impact on long-term liquidity of certain financial institutions should open market issuance be used for the rollover.

Li concurs with PBOC’s assessment of the negligible liquidity impact of the rollover, while also pointing out that the coupon rates are close to yields for 7-year and 10-year treasury bonds on the secondary market, and that an increase in the volume of 7-year special treasury bonds could also have a positive impact upon the yield curve.

Prior to the end of the year a further 100 billion yuan in special treasury bonds will be issued via the open market in order to rollover bonds issued in 2007.

According to Tianfeng Securities fixed-income analyst Sun Binbin this subsequent issuance of special treasury bonds is unlikely to have a significant impact on liquidity.

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