Quick Take: China to Roll Over Debts That Back Sovereign Fund

(Beijing) — China said it will issue 600 billion yuan ($90.1 billion) of “special government bonds” to roll over a debt that backs the country’s sovereign wealth fund.

When the fund, China Investment Corp., was set up in 2007, it received from the government $200 billion, equivalent to 1.55 trillion yuan at the exchange rate at the time. That sum in turn was financed by issuing “special government bonds” from 2007 through 2012.

The Ministry of Finance said in a statement the bond sale, slated for Tuesday, will be for rollover bonds to refinance some of those debts that are due in late August. The ministry will issue 400 billion yuan of seven-year notes at a coupon rate of 3.6%, and 200 billion yuan of 10-year notes at 3.62%.

Several domestic banks, handpicked by the ministry, will buy up those debts first before reselling them to the central bank on the same day, said Xu Zhong, head of research at the People’s Bank of China. That way, market liquidity won’t be affected by this massive bond sale, Xu added.

Under China’s Banking Law, the central bank is not allowed to buy government debt directly but may do so through the secondary market.

The rollover won’t have any effect on the central bank’s balance sheet, Xu said.

Another 96.29 billion yuan worth of special government bonds will due later this year, and another 852.71 billion yuan will be due by 2022.

Contact reporter Leng Cheng (chengleng@caixin.com)