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          Special bond issue won't seriously impact liquidity

          By Shangguan Zhoudong (chinadaily.com.cn)
          Updated: 2007-07-02 11:33
          Large Medium Small
          Chinese lawmakers last Friday approved the Ministry of Finance to issue 1.55 trillion yuan (US$202 billion) in special bonds, aiming to help the central bank handle excessive liquidity. But analysts branded the issue a kind of "moderate" policy and said it won't pull massive funds out of the market, China Business News reported.

          Insiders said that the ministry will issue the special bonds to the central bank to finance the purchase of foreign exchange reserves for the fledging State Forex Investment Company.

          They said the whole operation becomes an exercise in accounting, essentially shifting a portion of foreign exchange reserves from the central bank's balance sheet to the state investment company's. There would be little impact on domestic liquidity.

          The ministry also said that it will sell these special bonds in a gradual process to regulate money supply so as to keep the market stable.

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          Even if the central bank would sell off these special bonds to financial institutions directly to take the money back, the bonds will be released in tranches to keep the market stable, the insiders said.

          A source with the ministry also said that the market shows increasing demands for investment in treasury bonds, with the expanding gap between interest rates of lending and borrowing as well as the growing number of investment channels of insurance and social securities funds. The issue of these special bonds will help to meet demands.

          Issuing the special bonds to the central bank will have a moderate impact on the market compared with issuing them directly to financial institutions, according to Lu Zhengwei, a researcher with the Industrial Bank.

          "The central bank will sell the special bonds to mop up liquidity, but the frequency and amount depend on the money supply target and other market situations including the maturity of central bank notes," Lu said.

          Peng Xingyun, a financial expert at the Chinese Academy of Social Sciences, said that getting forex reserves through such means similar to asset swap won't impact the liquidity but can regulate the assets of the ministry and the central bank in a short time.

          Data show that the central bank issued 3.6 trillion yuan in central bank notes last year. Up to now this year, the total central bank notes issued have reached 2.5 trillion yuan.

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