Cash-strapped Central Huijin Considers Bond Issue

By Ouyang Xiaohong
Published: 2010-05-17

News, page 18 Issue 468
Translated by Tony Liu
Original article

The cash-strapped Central Huijin Investment Company, the domestic investment subsidiary of China's sovereign wealth fund - China Investment Corporation (CIC), is likely to issue yuan-denominated bonds.

Central Huijin, on the evening of April 30, announced that it will lower their dividend payout ratio paid by three state-owned banks including the Industrial and Commercial Bank of China, the Bank of China and China Construction Bank to 45 percent from 50 percent. It also announced it will participate in refinancing plans to raise their capital requirement to at least above 11.5 percent.

However, because it has turned over the 100 billion yuan in dividends received from its holding banks to its parent firm (CIC) to pay back interest on bonds issued by the Ministry of Finance, Central Huijin is actually short of money.

Therefore, Central Huijin faces a difficult choice. If it doesn't inject capital into the three banks, its existing holdings will be diluted; if it decides to inject capital, it needs a large sum of money to do so.

Several sources from Central Huijin told the EO that they have heard that in light of Huijin's current lack of capital, the issuance of RMB bonds can still be considered an attempt at an alternative financing channel.

"The CIC has only one shareholder, the State Council, therefore, the State Council will have the final say in the issuing of bonds by Central Huijin."

A source from the Ministry of Finance held that Central Huijin is also a company, so its issuance of bonds needs to go through fixed examination procedures.

A stock broker said Huijin's bonds will provide a big draw for investors, and if the opportunity arises, his company will compete to underwrite the issuance of bonds by Huijin.

The above source said if the amount of Huijin's bond issuance doesn't exceed 100 billion yuan, it will not have a big impact on the capital market.

As for who'll buy these bonds, the above source held in general, banks will be the major buyers.

As a result, there will likely form a capital cycle: Central Huijin issues bonds, which will then be bought by its holding banks and then Central Huijin will use the funds collected to replenish its holding banks.

in reality, Central Huijin does not spend money, but merely alters its financial reporting structure, which is equivalent to Huijin taking its debt and and changing it into capital by issuing bonds increasing its leverage and risk, but at the same time it also signifies that the risk to the holding company has shifted to Huijin.

Fan Wei, senior analyst at Hongyuan Securities predicted that the yield rate of Central Huijin's bonds would be about 1.2 times that of treasury bonds over the same period.

This article was edited by Rose Scobie.