Photographer: Qilai Shen/Bloomberg

China Plans Rollover of Bonds Backing Sovereign Fund

  • Yuan notes were issued as part of set-up of China wealth fund
  • PBOC is said to plan to buy 600 billion yuan due in August

The People’s Bank of China and the Ministry of Finance plan to roll over $89 billion worth of government bonds coming due in August that were used to help set up the nation’s sovereign wealth fund, according to people familiar with the matter.

China’s Finance Ministry issued about 1.55 trillion yuan of notes in 2007 and used the proceeds to buy an equivalent amount of foreign-exchange reserves from the central bank to set up China Investment Corp. The 600 billion yuan ($89 billion) of such securities coming due in August were sold to Agricultural Bank of China Ltd., and then in turn bought by the PBOC. The indirect maneuver was because the central bank isn’t allowed to buy government debt directly.

The bonds will be repriced through the operations, which will be arranged in mid- or late-August, said the people, who asked not to be identified as the discussions are private. Unlike the previous arrangement, the debt may be reissued to multiple banks that are primary bond market dealers, and the central bank will buy from them, according to the people. The PBOC declined to comment on the matter, while the MOF didn’t immediately reply to a faxed request for comment.

Under different scenarios, the handling of the maturing debt poses varying risks. If the bonds mature without being rolled over, it could affect the Finance Ministry’s fiscal-spending capacity. Alternatively, if the ministry issues ordinary debt to pay for the special notes, it could lead to a surge in supply weighing on the local market, Zhongtai Securities Co. analysts led by Qi Sheng wrote in a note last week. The debt due next month amounts to about six-fold the monthly average maturing last year.

Of the total 1.55 trillion yuan of debt sold a decade ago -- some $200 billion worth at the exchange rate of the time -- 1.35 trillion yuan was placed to Agricultural Bank of China, and about 200 billion yuan was issued in public auctions.

— With assistance by Heng Xie, Jing Zhao, Helen Sun, and Haze Fan

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