From News, page 4, issue 397, Dec 8, 2008
Translated by Zuo Maohong
Original article: [Chinese]

To support its stimulus package, China has started considering issuing 500 billion yuan in long-term construction treasury bonds in 2009, 470 billion yuan more than this year's planned issuance, officials involved in economic policy drafting told the EO.

As the year approached its end, the Ministry of Finance was busy planning its budget and bond issuance for next year. The EO learned the plans had undergone several adjustments after discussions with the central bank and the National Congress as the economic outlook worsened.

Analysts said the four big cuts in interest rates and deposit requirement in the past months had made the issuance of bonds on such a massive scale significantly cheaper.

"The interest rate of the bonds is determined by public bidding, benchmark interest rate cuts make the market expect looser monetary policy, which in turn helps reduce the bid interest rate," said Ling Chao, analyst at Changjiang Securities.

From December 5, the reserve requirement ratio for major banks and smaller ones were respectively cut by 100 and 200 basis points.

"This makes banks more willing to invest in some relatively lucrative medium-to-long term treasury bonds, which have high credit rating and zero risks," said a source from the capital department of China Construction bank.

"Benchmark rate cuts could also drive up issue prices of treasury bonds as they add liquidity to the market," said the source, adding the market was ready to embrace treasury bonds.

The key goal of the Chinese government's debt management had been repaying principal and payable interest, and to cover budget deficit. China has been in a budget deficit since 1994. In view of the harsh economic climate at present, a fiscal deficit seemed unavoidable in the coming year.

Deputy finance minister Wang Jun recently said China would issue more treasury bonds and that would widen the deficit, but bond issuance would be controlled within a certain range. At present, China's treasury bond issuances valued at about 18% of the country's GDP, as compared to the US's 75% and Japan's 150%.

Ye Ying, a senior bond researcher at Ping An Securities, projected that the issuances would range between 811.7 billion yuan and 1.7 trillion yuan, depending on the economic outlook. The estimation was mainly based on the outstanding principal and interest payable, the budget deficit, and planned spending.

Chen Bao Qiang, a bond analyst at China Merchants Securities, was certain that massive issuances of treasury bonds in 2009 would be welcomed by the market as a substitute for central bank bills, which would have much smaller issuances and bills amounting to 2.2 trillion yuan maturing next year.

The bid interest rate for the recently issued 22 billion yuan one-year treasury bond was 1.28%, far lower than the previous market expectation of 1.49%.

Based on recent policy orientation, traders believed there might be a further interest rate cut before the year end. With such anticipations, securities institutions generally had great enthusiasm in buying treasury bonds.