BIZCHINA / Center
Special bond issuance targets excess liquidity
(Xinhua)
Updated: 2007-06-28 09:20
The issurance of 1.55 trillion yuan of special T-bonds for the purchase
of US$200 billion of the forex reserve is seen as a more effective way to
deal with the economic dilemmas facing China.
The move is intended to harness the excess liquidity in the domestic
economy, said Finance Minister Jin Renqing. The cash in circulation has
been blamed for the skyrocketing rise of the stock market and real estate
prices that hint at an emerging economic bubble.
"China's excessive liquidity, as a result of unbalanced international
trade and economic order, has also given rise to constant trade friction
with foreign countries and inflation risks at home," said Dr Yin Jianfeng
with the Finance Institute of Chinese Academy of Social Sciences.
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The proposed T-bond issue, the largest in China's history, would be very
noticeable in its intended role of withdrawing currency from circulation,
Dr. Yin said.
Another intended goal of the T-bonds was to relieve the government of the
burden of its increasing foreign exchange reserve, which stood at US$1.2
trillion by the end of March, up US$135.7 billion from the end of 2006.
According to the International Monetary Fund standard, forex reserves
bought through T-bonds are no longer counted in the national foreign
exchange reserve, and once the transaction is completed, a sixth of
China's forex reserve will be in the hands of market players.
"Without a sufficient scale, the intended role of draining liquidity may
not be obvious," he said. "Because China's forex reserves were likely to
continue to rise and the central bank would face more pressure in coping
with excessive liquidity even after recent measures to withdraw currency
from circulation."
The bond issue, whose dollar purchase would be managed by a forex
investment company still in the making, will help domestic enterprises do
business abroad and enhance national economic competitiveness, Jin said.
However, the issuance of the special T-bonds comes with risks.
The Financial and Economic Committee, a powerful economic affairs arm of
the NPC, supported the State Council bill in a separate report to
lawmakers on Wednesday, but it urged the government to speed up the
process of formally establishing the forex exchange investment company by
issuing detailed management methods and improving its risk management and
market operation mechanism.
"Such measures are necessary because the treasury bonds are huge in scale
and incurring interest must be considered," the NPC committee said.
"In face of the volatile international economic situations, the funds
should be managed under tight supervision," it said.
Moreover, the proposed measures may need extra time to see their goals
realized.
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