China to test market appetite for debt with biggest offshore bond sale since 2016

China’s finance ministry will auction 7.5 billion yuan (US$1.1 billion) of government bonds across two, three and five-year maturities

Foreign ownership of Chinese government debt onshore fell to 10.5 per cent in April from a record 11.1 per cent in January, according to the latest Chinabond data

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China is launching its largest offshore bond sale in six years amid a rout in the global debt market. Photo: Reuters

Published: 9:12am, 15 Jun 2022

China will launch its largest offshore yuan sovereign bond sale in six years, testing global appetite during a debt market rout and a stream of outflows as global funds offload Chinese government notes.

The Ministry of Finance will auction 7.5 billion yuan (US$1.1 billion) of the central government bonds across two, three and five-year maturities on Wednesday, the first of four batches totalling 23 billion yuan planned for this year in Hong Kong, denominated in the offshore currency.

The offering is due on the same day the Federal Reserve is expected to consider its biggest interest-rate increase since 1994 as it looks to contain the hottest inflation in decades. Outflow pressure on Chinese government bonds could increase, given the widening monetary policy gap with the US that undermines the notes’ yield premium.

There are also attractions for domestic investors. The southbound Bond Connect, drawing capital from mainland China to bonds available in Hong Kong, offers traders a chance to hunt for arbitrage opportunities between onshore and offshore sovereign debt markets.

The expected Federal Reserve rate hike could increase the outflow pressure on Chinese government bonds. Photo: Reuters

“Dim Sum bonds have previously underperformed onshore peers amid capital outflows and yuan depreciation, resulting in a rise in yield premium over onshore peers,” Standard Chartered Bank strategists including Becky Liu wrote in a note, referring to yuan-denominated notes sold in Hong Kong. “Short-dated bonds are likely to receive the strongest support from domestic investors, especially banks.”