Experts said today the liquidity of capital in the stock market will not be affected by special treasury bonds that will be issued by the Ministry of Finance (MOF).

Sources said that China's top legislature will discuss with the MOF about issuing special treasury bonds for the country's foreign exchange investment at a six-day session beginning on June 24.

In March, the Chinese government said it would establish a State foreign exchange investment company this year to maximize returns on the country's huge foreign exchange reserves.

Tuesday's Shanghai Securities News quoted an unnamed insider as saying the company would receive capital from the MOF, which planned to issue US$200 billion to US$250 billion worth of special treasury bonds to purchase the same amount of foreign exchange from the central bank.

However, analysts said the establishment of the foreign exchange investment company may put pressure on liquidity, and neither special treasury bonds nor renminbi bonds issued by the investment company will affect the money supply. Only the excess liquidity will be hedged, and will not reduce the liquidity in the stock market.

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Meanwhile, the bonds will reduce capital pressure among banks, and the deposits in reserve may not increase frequently, said the experts.

Lin Zhaohui, a researcher with Guotai Junan Securities, said the monetary base will be returned and the increase of M2 will not be restrained if the bonds are accepted by banks.

A chief economist from Essences Securities, Gao Shanwen, said the establishment of a State foreign exchange investment company only affects the bonds market instead of the stock and real estate markets.

The liquidity is only locked in short term, as the trade surplus and funds outstanding for foreign exchange keep rising, which is decided by industry structures and economic growth.

The money supply will be sufficient, and the capital in stocks and real estate will be guaranteed, said experts.

The benchmark Composite Index on the Shanghai Stock Exchange closed yesterday at 4,269.52, up 16.18 points or a 0.38 percent increase from Monday's closing.

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