China Development Bank's plan for a domestic issue of first US-dollar bonds is set to open a new channel to alleviate the mounting upward pressure on the exchange rate of renminbi, analysts say.

Although the policy bank said the first issue is only US$500 million - a paltry amount compared to the tens of billions of dollars that are piling up in China's foreign exchange reserves every month this year - it carries the symbolic significance of a new way for the central bank to handle excess capital.

"US-dollar bonds will absolutely lessen the pressure in converting foreign exchange into renminbi, and therefore, to some extent, alleviate the upward pressure on the yuan to appreciate," said an analyst with Beijing-based China Securities.

China is facing increasing pressure to raise the exchange rate of yuan, which some of its trading partners complain is undervalued. The pressure is reflected in the rapid increases in the country's foreign exchange reserves, which soared by 42 per cent year-on-year to US$346.5 billion in the first six months of the year.

China Development Bank said last week it was planning to issue the country's first US-dollar bonds in the domestic interbank market. The purpose, it said, was to repay the foreign debts it had borrowed at higher costs and to raise forex funds for dollar-thirsty Chinese enterprises and key construction projects.

Officials with the bank said the move was a response to a government circular issued last year, which encouraged large and medium-sized State-owned enterprises to borrow domestically and restructure their foreign debts.

The circular pointed out two facts: interest rates on dollar deposits in the international market are at a decades' low; and China has sufficient forex funds as a result of trade surpluses. These factors translated into opportunities for Chinese companies to restructure foreign debts.

The US Federal Reserve cut its federal funds rate by 25 basis points last month to 1 per cent, the lowest since July 1958.

Liquidity in the market now stands at a fairly high level, with deposit excesses of foreign exchanges at Chinese banks totalling 33.7 billion yuan (US$4 billion) at the end of June.

China Development Bank, which mainly finances key infrastructure projects under State directives, is currently seeking opinions on the issue from interbank market participants through an online survey (www.chinabond.com.cn), which ends tomorrow, to ensure a successful issuance.

But the issuing bank is in a dilemma, analysts say. If the issue carries an interest rate that is below the level of US-dollar bonds in the international market, it would not appear appealing to Chinese investors, especially the potential big buyers. The largest four State-owned commercial banks all have their own channels to invest in international markets.

And if the interest rate comes out higher than its international equivalents, the issue misses the goal of raising low-cost funds to repay costlier foreign debts, analysts say.

The hope, they say, largely lies in the reaction of smaller financial institutions - the most certain buyers which have limited opportunities for forex.

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