Bond issuance to fund the agency that China is setting up to manage part of its foreign exchange reserves will not have a big impact on the domestic fixed-income market, a Ministry of Finance official said in remarks reported on Wednesday.
Bond markets are on edge in case they have to digest a flood of new paper from the fledgling agency, which state media reports have said could eventually have assets of up to $200 billion. But the finance ministry official, quoted in the China Business News, said the market would be able to absorb the supply because the bonds would be issued gradually.
The volume of what the official called "marketised" bonds sold by the new agency would be deliberately kept low this year in order to preserve the stability of the bond market, the paper reported. It said banks had asked the ministry about the potential impact of the new agency's funding policies.
"Bond issuance by the state foreign exchange investment company will not put serious pressure on the market because the bonds won't be issued all at once," the paper quoted the official, from the ministry's treasury department, as saying.
The official said the government was still discussing how much paper the forex vehicle would issue, and how. Economists expect the agency to issue bonds, probably denominated in yuan rather than in dollars, to the market and/or directly to the People's Bank of China in order to buy foreign currency from the central bank. China had $1.066 trillion in foreign currency reserves at the end of 2006. The new agency, to be headed by former vice finance minister Lou Jiwei, is unlikely to be fully functioning for several months, economists say.