Quick sell-out expected for Beijing’s first dollar bonds since 2004

The issue – the first of its kind in 13 years – will be a symbol of China’s financial strength after it received two credit downgrades in six months

PUBLISHED : Friday, 13 October, 2017, 6:18pm
UPDATED : Friday, 13 October, 2017, 10:14pm

Investors will snap up China’s US dollar-denominated sovereign bonds, analysts predict.

The US$2 billion expected to be raised by China’s first sale of dollar bonds in 13 years is a mere drop in the bucket for Beijing and its US$3.1 trillion in foreign exchange reserves. But the issue itself symbolises China’s financial and economic strength after two agencies lowered the country’s sovereign rating in the past six months, according to analysts.

“The bonds will be sold out in an hour,” said Hong Hao, research head at Bocom International, an investment banking and brokerage arm of Bank of Communications in Hong Kong.

“The amount is not huge and the issue is symbolic as there is need for China to build up offshore sovereign bond market and to diversify its debt structure.”

Chen Long, an analyst with Bank of Dongguan, also expected to see strong demand for the bond issue.

“The bonds will be subscribed very quickly given that the US$2 billion is not a big amount and there are many Chinese financial institutions in the Hong Kong market. It is unlikely to be undersubscribed,” he said.

China’s Ministry of Finance said on its website on Wednesday that it soon would issue US$1 billion of five-year bonds and US$1 billion of 10-year bonds in Hong Kong, without providing details.

China last issued foreign currency-denominated bonds in October 2004, raising 1 billion euro and US$500 million in London.

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The spread between the Chinese government’s dollar bond yield and US Treasury bonds is expected to be about 50 basis points, according to traders. In Hong Kong, Beijing’s bonds will be particularly popular since the market is filled with subsidiaries of Chinese financial institutions.

“The issue will be a slap in the face [for China bears],” said a trader who declined to be identified as he was not authorised to speak to media.

Lu Zhengwei, chief economist with the Industrial Bank, said the cost and timing of the sale of the dollar bonds – coming as the Federal Reserve begins to raise US interest rates – will be “appropriate” for the issue.

It will offer overseas investors an opportunity to evaluate China’s real credit worthiness, Lu said.

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In May, Moody’s Investors Service cut China’s sovereign ratings by one notch to A1 on concerns about the country’s mounting debt load. The Ministry of Finance responded by accusing the rating agency of overestimating China’s economic difficulties and underestimating its capability in reforms.

In September, Standard & Poor’s downgraded China’s sovereign rating for the first time since 1999 to A+ from AA-, citing what it called the country’s increased economic and financial risks.

Lu said the agencies have misdiagnosed China’s economic and financial health.

“The result will prove they are wrong”, the economist said. “There is no need for China to supplement foreign exchange reserve, nor does China see funding difficulties.”

The Chinese economic landscape has changed dramatically since Beijing’s last sale of foreign exchange bonds in 2004.

In 2004, China had few companies selling dollar bonds abroad. But in 2016, Chinese institutions and companies issued more than 250 batches of bonds, raising US$120 billion. The Chinese government’s dollar bond yield will provide a benchmark for the pricing of corporate China dollar bonds.

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In 2004, China’s onshore bond was still in its infancy. Today, it is a US$9 trillion marketplace that can be accessed overseas via systems such as Bond Connect with Hong Kong.

Holdings of all forms of Chinese bonds by offshore investors and cleared by China Central Depository and Clearing Co rose by 38.7 billion yuan (HK$45.8 billion and US$5.88 billion) in September to 896 billion yuan, according to calculations based on figures from the clearing house.