China to issue 50-yr T-bond Friday, market diverges on coupon rate

China will float the country's first 5 0-year T-bond on Friday on the interbank and exchange-based bond marke ts, with the issuing coupon to be determined by public bidding, the Mi nistry of Finance recently said in a publication.

The bond will become the country's longest maturity T-bond and is l ikely to experience several interest rate cycles. The issuing coupon r ate is therefore under hot debate. MARKET DIVERGED ON COUPON RATE

Market analysts widely held that the pricing mechanism should fully reflect interest rate, inflation, volatility risks and risk in econom ic fluctuation as it will span several economic cycles during its 50 y ear lifetime.

According to the bidding mechanism, the coupon rate would be determ ined by hybrid bidding, which will lead to market oriented and competi tive pricing.

Several institutions have placed their predictions between 4.3 perc ent and 4.5 percent. Shenyin & Wanguo Securities gave a prediction bet ween 4.4 percent and 4.5l percent and China International Capital Corp oration (CICC) sees a range from 4.3 percent to 4.4 percent.

The Bank of Nanjing previously forecasted in a report that the coup on rate should be between 4.7 percent and 5 percent given the current inflation level but later argued that the 4.5 percent is a more reason able level.

Some analysts gave an empirical prediction with reference to 50-yea r T-bonds issued in Britain, France, and Greece.

A trader with a Shanghai-based commercial bank noted that the yield spread between a 30-year T-bond and a 50-year T-bond stands at 20 bas is points (BPs) in Britain, but based on China's economy and inflation , the yield spread should reach 10 BPs, resulting to a coupon rate of 4.5 percent.

Li Huaiding, a fixed-income analyst with Guosen Securities, introdu ced three approaches for the calculation:

First, approximate the coupon rate with the spread between the 30-y ear T-bond and the 10-year T-bond, which arrives at a rate of 4.75 per cent.

Second, draw a line between the end of the 29th and 30th year on th e yield curve and get the yield on the 50-year along the line, which l eads to a yield of 4.36 percent.

Finally, determine the rate with reference to inflation. However, d omestic CPI statistics do not cover 50 years, so they must be referred to the US' CPI data from 1947 to 1997. WHO WILL BUY

Zhanglei, a fixed-income analyst with Shenyin & Wanguo Securities s aid that insurance companies and social insurance funds would act as t he major buyers.

Some insiders also noted that insurance institutions are under incr easing pressure on spending out the capitals, so they will welcome the bond given that the yield could cover their policy costs and the term meets the required level.

Statistics show that insurance companies added a total of 62.413 bi llion yuan of bond holdings during the first ten months of this year, in comparison with an annual increase of 200 billion yuan in the last five years.

Chen Jianheng, a fixed-income analyst with CICC, noted that the abs olute coupon rate matches with the long term, so insurance companies a re widely willing to buy it.

China's 20-year and 30-year bonds were all issued at yields above 4 percent this year, which is above the policy cost of 3.6 to 3.8 perce nt and statistics show that insurers buy more bonds in April and Octob er, which coincides with the issuance of 30-year T-bonds, added Chen.A n Guojun, a bond expert with the Chinese Academy of Social Sciences, a lso noted that commercial banks, insurers, and pension funds will be t he major investors upon the debt-matching demand.

"We are willing to buy it for its ability to match our debt terms," said Xiong Kai, a trader with the Bank of Chengdu. "We will hold it t o maturity."

However, not all banks intend to invest in the bond. "I cannot find reason why we buy it," said Chen Ruofei, a trader with the China Indu strial Bank, "the bond will be subject to sharp volatility and low liq uidity, and most banks' debts are in the short-term."