Heavy demand for US$2b billion China sovereign bond issue

Debt sale is expected to serve as pricing benchmark for upcoming bonds from state-owned firms

PUBLISHED : Thursday, 26 October, 2017, 4:38pm
UPDATED : Thursday, 26 October, 2017, 11:06pm

International investors are piling into a rare global bond offering from China, with orders topping over US$10 billion in the first hour after books opened on Thursday, more than five times the amount on offer.

China, which last sold a global bond in 2004, is offering 5-year bonds at 30-40 basis points (bps) over US Treasuries and 10-year bonds at 40-50 bps above, in two tranches of US$1 billion each.

“Everyone wants to get their hands on this bond. These are tight levels but we are interested as there is little risk of repeated issuance in the same maturity bucket,” said Edmund Goh, fund manager at Aberdeen Standard Investments.

The sovereign debt sale is expected to serve as a pricing benchmark for China’s state-owned firms which are among Asia’s most active issuers in the offshore bond market.

Existing bonds from these issuers have seen spreads narrow in anticipation of tight pricing of the underlying sovereign.

Export Import Bank of China’s bonds have rallied 10 bps since the sovereign debt plan was announced earlier this month. The bonds due 2022 are now trading at 65 bps over US Treasuries. The US$1.15 billion bond was issued in March at a spread of 85 bps.

“The SOE [state-owned enterprises] sector will benefit from a tightly priced sovereign and we may see the sector rally a bit further,” said Goh.

IFR reported that the bonds are expected to be included in JP Morgan’s EMBI [Emerging Market Bond Index] after the sale. This means that many emerging-market funds will have to buy them to track the benchmark, even though the securities will not be unrated.

Last month, S&P cut China’s long-term sovereign credit ratings by one notch to A+ from AA-, after a downgrade from Moody’s in May. The move put S&P’s ratings in line with those of Fitch and Moody’s.

Both S&P and Moody’s cited risks from a rapid build-up in debt.

The International Monetary Fund warned this year that China’s credit growth was on a “dangerous trajectory” and called for “decisive action”, while the Bank for International Settlements said last September that excessive credit growth was signalling a banking crisis in the next three years.

China’s finance ministry has described the S&P downgrade as “a wrong decision” that ignored the economic fundamentals and development potential of the world’s second-largest economy.

In the opening speech to the 19th party congress last week, President Xi Jinping said China will deepen economic and financial reforms and further open its markets to foreign investors as it looks to move from high-speed to high-quality growth.

Bank of China, Bank of Communications, Agricultural Bank of China, China Construction Bank, CICC, Citigroup, Deutsche Bank, HSBC, ICBC, Standard Chartered Bank, have been hired to manage the deal.