Bond issue, though unrated, is eagerly snapped up
Print Edition
International investors stamped their approval on China鈥檚 largest-ever dollar-denominated sovereign bond issue by placing 11 times more orders than debt on offer.
In late October, the Ministry of Finance issued US$2 billion of the bonds in Hong Kong, evenly split between five-year and 10-year maturities. It was the nation鈥檚 first dollar sovereign bond offering since October 2004.
The rare issue drew about US$22 billion in orders, 35 percent from regions outside Asia, including Europe and offshore US markets.
鈥淭he bonds will add important investment and hedging tools to domestic and foreign entities, enrich financial products in international capital markets and enable international investors to share the achievements of China鈥檚 economic development,鈥 said Lian Ping, chief economist at Bank of Communications. 鈥淭he bond offering can help improve the currency and term structures of China鈥檚 sovereign debt.鈥
China鈥檚 foreign-exchange reserves hit US$3.1 trillion by October, nearly an eightfold increase since the end of 2003, just before the government issued its last dollar sovereign bonds. The balance of payments remains in surplus.
鈥淭his issue demonstrates China鈥檚 commitment to engaging international investors as it transforms its economy, opens its capital markets and strengthens its global connections through the Belt and Road Initiative,鈥 said Peter Wong, deputy chairman and chief executive of HSBC Asia-Pacific.
鈥淚t also reinforces Hong Kong鈥檚 position as a key financial center for Chinese issuers raising debt capital, especially for 鈥楤elt and Road鈥 projects,鈥 he added. 鈥淚t should enhance market liquidity in Hong Kong through the eligibility of these bonds for repo transactions in the local interbank system.鈥
The new sovereign bonds may also help improve the confidence of overseas markets in China鈥檚 economy and sovereign credit. They were issued without a rating from global credit-rating agencies.
China鈥檚 credit rating was cut this year by Moody鈥檚 and Standard & Poor鈥檚. Moody鈥檚 lowered its rating to 鈥淎1鈥 from 鈥淎a3,鈥 and S&P dropped its rating to 鈥淎+鈥 from 鈥淎A-.鈥 Some observers said the decision highlighted the bias of the two agencies in assessing debt according to Western standards.
鈥淭he rating agencies didn鈥檛 have a full understanding of the development path, growth pattern and characteristics of the Chinese economy,鈥 Lian said. 鈥淭hey overlooked the great potential and sound fundamentals of the economy and the government鈥檚 ability to manage financial risk.鈥
Key reference
Hong Kong Chief Executive Carrie Lam said the result of the debt issue showed that sovereign bonds provide a robust, high-quality investment.
鈥淗ong Kong can be a good platform for the Ministry of Finance to issue bonds further in the future, which shows the interconnection, interaction, complementation and reciprocity of financial systems of the mainland and Hong Kong,鈥 she said.
Issuing foreign currency sovereign bonds forms a market-based yield curve through secondary market trading. That will provide an important reference pricing system for the offshore financing of Chinese companies and raise the efficiency of their pricing ability.
The rate of return of the US$1 billion five-year bond is 2.196 percent, with a coupon rate of 2.125 percent on October 26, the first day it was officially launched. The 10-year bond has a 2.687 percent yield and a coupon rate of 2.625 percent.
The yield on the five-year bond was 15 basis points higher than similar maturity US Treasury bonds, while the yield on the 10-year bond was 25 basis points higher. The yields were close to those of sovereign bonds with a 鈥淎AA鈥 S&P rating.
鈥淓veryone wants to get their hands on this bond,鈥 said Edmund Goh, fund manager of Aberdeen Standard Investments. 鈥淭hese are tight levels, but we are interested because there is little risk of repeated issuance in the same maturity bucket.鈥
The bond issue was underwritten by Bank of China, Bank of Communications, Agricultural Bank of China, China Construction Bank, CICC, Citigroup, Deutsche Bank, HSBC, ICBC and Standard Chartered Bank.
The dollar sovereign bonds were issued days after the end of the 19th Congress of the Communist Party of China, which set a course of stable economic growth.
鈥淚n the future, China may gradually explore the long-term mechanism for establishing sovereign foreign-currency bonds to continuously improve the openness, depth and breadth of financial markets,鈥 Lian said.
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