Investors pile into China’s first global dollar bond sale since 2004, over buying it by 10 times

Beijing says it has received orders of around US$22 billion for the offer comprising two tranches of five-year and 10-year bonds

PUBLISHED : Friday, 27 October, 2017, 10:49am
UPDATED : Monday, 30 October, 2017, 5:31pm

Investors piled into the Chinese government’s first global dollar bond sale since 2004, oversubscribing the US$2 billion issue by more than 10 times, underscoring the overwhelming demand for the rare debt offering.

About US$22 billion of orders have been received for the bond sale, comprising two tranches of five-year and 10-year issues, each worth US$1 billion, according to a Thursday statement by the Chinese Ministry of Finance. The five-year tranche pays a coupon of 2.125 per cent to yield 2.196 per cent, while the 10-year tranche pays a coupon of 2.625 per cent to yield 2.687 per cent.

Explainer: Why is China issuing its first dollar bond after 13 years’ absence from the market?

The sovereign bonds’ pricing came in much tighter than the initial guidance of between 2.35 per cent and 2.48 per cent for the five-year tranche and 2.86 per cent to 2.96 per cent for the 10-year tranche, reflecting strong investor demand.

The new sovereign issue is a move by the Chinese government to ward against a rising US dollar, and to provide a more diversified capital market amid sluggishness in the dim sum bond market, as yuan-denominated debt sold outside mainland China is called. By holding on to dollar-denominated Chinese sovereign bonds, Chinese investors can hedge against a strengthening dollar.

Issues of dim sum bonds will halve to 14 billion yuan (US$2.1 billion) in 2017, compared with 28 billion yuan in each of the last three years. Demand for dim sum bonds had been sluggish due to weaker yuan and higher funding cost in dim sum rates, SEB said.

China’s decision to issue a dollar bond was particularly significant given the continued surge in the volume of offshore bond issuances coming out of China, with Chinese issuers accounting for more than 65 per cent of total issuance in the Asian US dollar bond market so far in 2017, said Linklaters Asia’s head of Capital Markets William Liu.

Still, at least one bank said the bond wasn’t “worth chasing.”

“We think the issuance was priced too expensive,” according to a research note by SEB.

While the Chinese government does not need to borrow offshore, with a domestic debt market at US$9 trillion that’s now the world’s third-largest, analysts said the bond sale could be intended to create a benchmark that other dollar bonds by Chinese state-owned enterprises can be measured against. Before this issuance, there was no official sovereign credit benchmark for corporate US dollar issuances out of China.

Earlier this year S&P and Moody’s cut China’s sovereign rating by one notch to A+ and A1 because of concerns over slowing economic growth and ballooning debt levels.