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    China considers bond sale to buy forex

    By Song Hongmei (chinadaily.com.cn)
    Updated: 2007-06-19 14:46
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    China's legislature will review a proposal to issue special treasury bonds to buy foreign currency from the central bank at a session convening from June 24 to 29, the government said in a statement on its Web site Monday.

    China is setting up a State forex investment company that will use a portion of the country's hefty foreign exchange reserves to buy investments with higher yields. China's forex reserves reached US$1.2 trillion by the end of March, as exports keep increasing.

    The State Investment Company (SIC) will probably be officially established before the end of this year, said Hu Xiaolian, director of the State Administration of Foreign Exchange, in March.

    Market analysts said the SIC probably would be set up earlier than the planned date as the National People's Congress Standing Committee would conduct a relevant review next week.

    Monday's statement said that the review would?focus on the proposal for the Ministry of Finance to issue special treasury bonds to buy foreign exchange, which is overseen by the central bank.

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    The National People's Congress Standing Committee would also review a proposal to adjust the annual ceiling on treasury bond issuance in the country at the session, the statement said.

    The details on the amount of the bond sale and how it would be sold was not mentioned in the statement, but media?reported earlier that the bonds would be issued in stages and therefore would not have a big impact on the financial markets.

    Economists expect the finance ministry will sell yuan-denominated treasury bonds to buy US$200 billion to US$250 billion of foreign reserves from the central bank to put into the SIC, earlier media reported.

    The special treasury bond issue would help drain the excessive liquidity in the market as a capital outflow channel, they said, adding that the liquidity-driven rally that pushed the index up 2,949 points in less than 18 months is unlikely to maintain its momentum much longer.

    Although the bond sale is pending approval, the SIC has agreed to invest US$3 billion in Blackstone Group, the world's second largestprivate equityfund, said a joint news release last month.

    According to the news release, the SIC will buy a less than?10 percent non-voting stake in Blackstone. The deal will be closed concurrently with Blackstone's US$4 billioninitial public offering(IPO) planned to launch on the New York Stock Exchange at the end of June. The SIC will buy the shares at 95.5 percent of the IPO price and hold them for at least four years.

    Lou Jiwei, Vice-Minister of Finance, was appointed head of the working group of the SIC in March. Lou is in charge of the forex investment company's establishment, in which both the Ministry of Finance and the central bank are closely involved.

    China's forex reserves may reach US$1.6 trillion by the end of the year and may exceed US$2 trillion in 2008 if current growth keeps up, said Fan Gang, a monetary policy committee adviser of the People'sBank of China, at an economic seminar on June 5.

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