The Ministry of Finance will issue the first two tranches of the planned special ‘anti-pandemic’ treasury bonds, worth Rmb100bn, this week, it announced on Monday evening.
The Rmb100bn issuance will be split evenly between five and seven year tenors with fixed rate annual coupons.
The notes will be auctioned among government bond underwriters on Thursday morning, before they distribute them to investors after the auction and on Friday. The bonds are tradable from Tuesday next week.
Late on Tuesday, the MoF announced the third tranche, which will raise Rmb70bn from a 10 year note. The auction is scheduled for next Tuesday (June 23) with distribution until Wednesday.
The MoF decides on a group of government bond underwriters every three years. The current list, which features 54 banks, was finalised at the end of 2017 for the period of 2018 to 2020.
It also keeps a group of underwriters — a total of 40 banks for 2018-2020 — for non-tradable certificated bonds.
Unlike normal central government bonds, special treasury bonds are off budget. The Chinese government has sold special treasury bonds just twice before — to beef up the capital ratios of the big four state-owned banks in 1998, and in 2007 to purchase foreign exchange and set up China Investment Corp.
China said it will issue Rmb1tr of these bonds at its May parliamentary meetings. It first revealed the idea of using special treasury bonds to cover some of the costs related to the fight against the Covid-19 pandemic at a Politburo meeting at the end of March. The size — only about 1% of China’s GDP — came below market expectations.
The upcoming Rmb100bn bonds will be sold publicly. Onshore media reports suggest China plans for the whole Rmb1tr to be sold publicly and by the end of July, most with a tenor of 10 years.
“To have all of the Rmb1tr issued in the public market will be a surprise,” said a China economist.
Market participants previously told GlobalCapital China that the Rmb1tr is likely to be split between private and public issuance — as China did in 2007. At the time, Rmb200bn of the notes were sold in the public market, with the bigger Rmb1.35tr portion placed directly with the then-unlisted Agricultural Bank of China.
Regardless of the issuance method, it is almost certain that the People’s Bank of China (PBoC) will complement the special treasury bond issuance on the monetary policy front, the economist said.
“It just depends whether they use the [required reserve ratio] cut or other tools like [reverse repurchase agreements] or re-lending to provide liquidity support,” he added.
The central bank cut the RRR for the big four banks and released Rmb240bn in 1998. In 2007, it purchased the full Rmb1.35tr placed with ABC through open market operations.
Liquidity concerns
On Monday afternoon, onshore media started reporting China’s intention to sell all Rmb1tr in the public market. Following the news, the yield on one of the most recent central government bonds, a 2.68% 10 year sold in late May, rose to 2.81% at 6pm on Monday Beijing time from 2.72% in the early afternoon, according to Everbright Securities.
“However, we believe that the actual impact of the market-oriented issuance of special treasury bonds is relatively limited, and the room for further rise in 10 year Treasury yields in the short term is also limited,” analysts wrote late on Monday.
China will likely reduce the sale of other types of government deals to make up for the anti-pandemic bond, reckoned the economist.
For example, local governments already sold a record Rmb1.3tr of bonds last month, according to the MoF. The volume from the first five months combined was nearly Rmb3.2tr.
“The frontloading took a lot of the pressure off [the market] so there is room to manoeuvre,” he added. “China will likely balance out the extra volume from the special bond with less local government and normal treasury bond issuance.”
Citic Securities expects the MoF to keep a similar pace for issuing the remaining Rmb900bn of special bond, with two Rmb50bn tranches in each outing. That points to Rmb300bn-Rmb400bn of issuance in June if the government’s goal really is to sell all the Rmb1tr by the end of July, Citic’s fixed income research team said in a Tuesday report.
Even at the higher end of that estimate, the net issuance volume of government bonds in June will most likely not exceed Rmb640bn, which is not a large amount for a single month, Citic said.
This is based on the Rmb240bn of normal treasury bonds already announced, and the assumption that local government bonds issuance will be largely halted to “give way” to MoF’s special bonds.
“There is no need to worry too much about liquidity,” analysts wrote. “With the combination of fiscal and monetary [policies], we expect the impact of special treasury bond issuance on the capital to be controllable.”
Updated on Wednesday morning Hong Kong time with information on the third issuance of the special treasury bond.