Chinese Finance Ministry bond a hit with institutions
First round of tendering worth 16 billion yuan more heavily subscribed than last year's offering, despite having a lower coupon
China's Ministry of Finance yesterday concluded its tender offer for tranches of its 28 billion yuan (HK$35 billion) bond, drawing strong demand for the 16 billion yuan institutional offer.
The bond was more heavily subscribed than the ministry bond tendered last year despite the fact that this year's offer was bigger and more tightly priced.
The seven billion yuan, three-year tranche - the largest piece of the offer - was 3.3 times subscribed with the coupon fixed at 2.4 per cent. Last year's tendering in June saw a three-year, five billion yuan tranche covered 2.14 times, with a coupon of 2.71 per cent.
The ministry split the bond into three, five, seven, 10, 15 and 20-year tranches. Most of the bidding was for the three-year part, drawing 23.4 billion yuan from institutions.
"What's interesting is how the distribution of paper is still massively biased towards the front end of the curve, with the three-year area representing half the total issuance," said Guy Stear, head of Asia research for Societe Generale.
This was despite the fact that the longer-dated tranches offered substantially more yield, particularly when compared with the flat yield curve seen on the 2013 bond.
Stear said this was due to overwhelming demand from banks, which were seeking shorter-dated yuan assets to book against their yuan deposits. The longer-dated paper would be of more interest to insurance companies, but clearly these institutions were less involved in the offer.
Becky Liu, a senior rates strategist for Standard Chartered, said that the CNH - or offshore yuan - loan-to-deposit ratio in the Hong Kong banking system was 13 per cent at the end of 2013, suggesting that CNH deposits were underused by local institutions. They needed assets to cover their interest charges, she said.
The pricing was attractive to investors. Liu calculated that the three-year coupon translated into yield of US dollar Libor plus 80 basis points on a cross-currency swapped basis.
KfW this month issued a two-year dim sum bond at Libor minus 32 basis points on a swapped basis. In other words, investors were significantly better compensated for taking on the risk of the Chinese sovereign than for shorter-term debt of a German bank.
Liu said last year's interbank liquidity squeeze in China's domestic market skewed the bidding for the year's ministry bond. That explained the marked difference in subscription levels and the substantially tighter pricing for this year's offer, notwithstanding a 2.8 per cent depreciation in the yuan.
A second round of tendering for the bond will happen later in the year for institutional and retail investors.
