Ministry assures bonds not to cool stock market

(Shanghai Daily)
Updated: 2007-07-06 08:26

China's proposed issue of 1.55 trillion yuan (US$200 billion) in special treasury bonds is not aimed at cooling the sizzling stock market and won't have a direct impact on money supply, the Ministry of Finance was quoted as saying yesterday.

The sale of the bonds, which will be used to buy foreign exchange reserves to help set up a state investment firm, will replace part of the central bank bills to mop up excess liquidity, Xinhua news agency reported, citing the ministry.

The ministry also noted the special bonds won't directly affect the existing liquidity in the stock market and it won't directly sell the debt to the People's Bank of China, the central bank, according to Xinhua.

Xinhua also quoted Li Yang, a researcher at the Chinese Academy of Social Sciences, as saying that the special bonds may be sold to an intermediary financial institution before being passed on to the central bank via an asset swap.

"The comment (by the finance ministry) on the issue of the special bonds is likely to help ease concerns over a big impact on liquidity," said Zhang Yang, an Orient Securities Co analyst. "If the central bank doesn't change its target of mopping up cash from the financial system, (the special bond sales) won't help soak up more liquidity."

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T he China Business News reported yesterday that the ministry will soon start the sale of the first batch of the special bonds valued at 500 billion yuan. The ministry has applied to the State Council for the offer, the newspaper said, citing unnamed sources.

The remaining special bonds will be issued in two batches with about 500 billion yuan targeted in each sale based on the need of the country's forthcoming overseas investment company, the report said.

News over the issuance of special bonds has recently spooked the domestic stock market, stoking up investors' jitters over a sudden tightening in liquidity and possible follow-up moves by the government to cool the hot market.

Chinese yuan-denominated shares have nearly tripled in value since the start of 2006 as a growing number of citizens channeled low-yielding bank deposits to shares to ride the rally.
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