China to use public auctions for sale of special ultra-long debt

CHINA plans to issue its special ultra-long sovereign notes mainly through public auctions in the interbank market rather than through targeted sales, people familiar with the matter said. 

The government will start selling the bonds from the second quarter at the soonest, they said, with one of them adding that the tenors may be as long as 50 years. China’s top economic planning body is currently reviewing projects the nation can spend the proceeds on, according to the people, who asked not to be identified as the information is private. 

China’s financial system may face a higher chance of liquidity pressure if the nation opts to sell bonds publicly, instead of at private auctions. When the debt is sold publicly, a wider pool of banks will need to set aside cash to make purchases, resulting in less supply in the money market. Historically, the central bank used to offer targeted liquidity support when bonds are sold to a smaller group of buyers in private auctions.

When and how China will sell the one trillion yuan (S$189.3 billion) of special debt – a plan announced during its top legislative meeting in early March – has become a hot topic in the market, amid concerns in some corners that a surge in supply may threaten a sizzling bond rally.

Speculation that the debt sales will be done through private auctions helped to push 30-year government yields toward the lowest in two decades on Tuesday (Mar 19), according to traders. 

The plan is still subject to change as the projects are yet to be finalised, the people said. The Ministry of Finance and National Development and Reform Commission did not immediately respond to requests for comment from Bloomberg News.

SEE ALSO

China plans one trillion yuan special ultra-long debt for economy

DECODING ASIA

Navigate Asia in
a new global order

Get the insights delivered to your inbox.

The issuance of special government bonds, which is not factored in China’s deficit calculations, started as targeted sales to state banks years ago and then evolved into auctions for the public market. The sales this year would be the fourth new issuance in the nation’s history.

The government issued such bonds in 2020, when the pandemic broke out. It did so to help fund local authorities’ efforts in controlling the spread of Covid-19 as well as for infrastructure investment.

Concerns over China’s deflation, an extended property crisis and a slumping stock market has helped turbocharge a stellar rally in government bonds, pushing the benchmark yield to the lowest since 2002 earlier this month. The advance paused amid a slight uptick in economic data and Beijing’s implicit guidance the bull run was overheated. BLOOMBERG