ChinaBlog.George.Yuyu.Huang

China is struggling against excessive liquidity

The state council is expected to issue 200 billions dollars special bonds to finance its investment body, aiming at lifting the pressure of excessive liquidity.

Chinese economy is troubled with huge investment, potential inflation and property bubble which exist both in housing and stock market.

Due to lack of current consume, china’s economy depends heavily on export and investment. The former caused the flooding foreign exchange and reinforced the speculation that RMB will be appreciated. Hot money was emitted into china by the faked trade. Thus, excessive liquidity in the banking system is unavoidable. The cheap loans spurred further investment and resulted in exports eventually. Above circulation makes China’s central bank under increasing pressure to maintain the stability of RMB.

The establishment of investment body may ameliorate the pressure at moment. However, if the government wants to resolve the problem fundamentally, the decision-makers must change the economical growth model that relied on exports. China must develop and enjoy its domestic market. So, it is urgent to provide the public service which is too scarce and too expensive, making the mass dare spent their money.

FT Beijing

China investment body gets first funds

By Richard McGregor in Beijing
Published: June 27 2007 17:29 | Last updated: June 27 2007 17:29
China’s new state investment agency is poised to secure its first significant tranche of funding with the announcement that the finance ministry will soon issue $200bn in bonds to capitalise the body.
The official media said that a draft bill to approve the special treasury bonds had been submitted to a committee of the national legislature, which is expected to pass the measure within days.
The launch of the Chinese agency coincides with an intensifying global debate about the role of sovereign investment bodies and their emerging clout in financial markets.
The possibility of tie-ups between such agencies was mooted on Wednesday by an official of a Dubai state holding company, who said the two countries were discussing mutual investments, such as asset swaps.
“At the highest level there is already a connection. But the next step is going to be at the various business-entity levels,” Yu Lai Boon, chief investment officer at Dubai World Group, was quoted by Reuters as saying at a conference held in Singapore.
The Chinese agency was established earlier this year to seek higher returns on a portion of the country’s swelling foreign exchanges reserves, which stood at $1,202bn (€890bn, £600bn) by the end of March.
A flurry of statements issued on Wednesday did not clarify who would buy the bonds, a key point in determining the impact of such a large issuance on domestic economic management.
The ministry could sell the bonds to the People’s Bank of China in exchange for the foreign exchange reserves now held on the central bank’s balance sheet, allowing the agency to receive the $200bn in one hit, with few implications for the economy.
But if the bonds, equal to about 5 per cent of Chinese gross domestic product, are sold to the public, it will take much longer to raise the funds and pit the ministry against the central bank in managing domestic liquidity.
The central bank is now responsible for managing liquidity, mainly through extensive issuance of bank bills to drain the huge amount of extra cash in the system produced by the trade surplus and other capital inflows.
Jin Renqing, the finance minister, said the bonds would have maturities of 10 years, with the aim of setting a benchmark for long-term yields into the future. “The special treasury bond issuance will help drain the excessive liquidity in the market and improve macro-economic control.”
The committee of the National People’s Congress, the top lawmaking body overseeing the bill, said in a statement the measure was necessary “because the treasury bonds are huge in scale and incurring interest must be considered”. It added: “In the face of the volatile international economic situations, the funds should be managed under tight supervision.”
The investment agency, which will be headed by Lou Jiwei, a former vice-minister for finance, and which has yet to set up its own office, is expected to start work towards the end of the year.
Ahead of its launch, the investment agency spent $3bn to buy into the initial public offering of Blackstone, the US private equity group.
Most of China’s foreign reserves are invested in low-yielding treasury bonds and other fixed-income instruments.

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