China to sell first dollar bond in 13 years in Hong Kong to set benchmark for Chinese issuers

They will comprise US$1 billion in five-year, and US$1 billion in 10-year notes

PUBLISHED : Wednesday, 11 October, 2017, 6:20pm
UPDATED : Thursday, 12 October, 2017, 9:29am

China’s Ministry of Finance has revealed plans to sell US$2 billion worth of dollar-denominated sovereign bonds in Hong Kong, its first dollar bond offering since October 2004, that will set a bellwether issue for other Chinese issuers amid a red-hot Asian corporate dollar bond market.

They will be issued in the coming days, and comprise of US$1 billion in five-year, and US$1 billion in 10-year notes.

Final details of the exact timing of the offer will be published ahead of the issuance, officials said, and listed in Hong Kong.

While China’s 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 suggested the ministry’s decision to issue dollar bonds may be intended to create a benchmark standard which the performance of other dollar bonds issued by the country’s state-owned enterprises can be measured against.

Increased transparency in bond pricing may help other Chinese issuer to raise funds in Asia’s booming dollar bond market, and help push down their borrowing costs if the benchmark sale is successful.

This new issue is going to set a credit benchmark for other Chinese issuers
Frances Cheung, head of Asia macro strategy at Westpac Banking

“This new issue is going to set a credit benchmark for other Chinese issuers,” Frances Cheung, head of Asia macro strategy at Westpac Banking.

Under the government’s priority “Going Out” and “Belt and Road” policy initiatives, Chinese corporates have undertaken business expansion globally, which require dollar-denominated funding in recent years.

But companies which choose to raise funds through the Asian dollar bond market instead of through traditional loans from offshore commercial banks are likely to enjoy a more diversified investor base, said Wu Qiong, an analyst at BOC International.

The ministry’s bond sale comes ahead of China’s 19th Communist Party Congress, which kicks off on October 18, during which the government will be keen maintain stability across the country’s stock, bond and currency markets, which may help boost market demand.

The new sale will test market appetite for Chinese credit after agencies S&P and Moody’s both downgraded the nation’s long-term sovereign credit rating this year by one notch to A+ and A1, respectively, due to concerns over slowed economic growth and rising debt levels.

Governments with a higher rating are typically able to market their debt at lower interest rates.

China’s government disagreed with the ratings cuts, and impact in the domestic bond market was limited.

Demand for the new issue is expected to be strong given its rarity, analysts said.

The strength in Asia’s investment-grade dollar bond market this year has also seen spreads pushed to multiyear lows amid robust demand from commercial banks for dollar assets that yield higher returns than US Treasuries.

“China’s credit is still of high quality. This bond issue is going to be hot,” said Wu Qiong, analyst at BOC International.