Thu, Oct 12, 2017 - Page 11 News List

China preparing to issue US dollar bonds: sources

MARKET MUSCLE:The issuance of dollar-denominated sovereign bonds would provide a benchmark for pricing state-owned firms, which could reduce borrowing costs

Bloomberg

China is moving forward with plans to issue its first sovereign bonds in US dollars since 2004 in a deal that would put a symbolic seal of approval on the booming offshore Asian debt market.

The Chinese Ministry of Finance was yesterday scheduled to meet with bankers in Beijing to discuss the sale, according to people familiar with the plans.

The deal is aimed for as soon as this month, said the people, who asked not to be named as the specifics have not been made public.

The ministry said in a statement that it would sell US$2 billion of notes.

While Beijing does not need to borrow offshore, with a domestic debt market that is now the world’s third-largest, its bonds would provide a new benchmark for pricing the country’s state-owned enterprises. A successful deal would pull down those borrowing costs and might fuel further sales after what has been record issuance this year.

Chinese investors have been eager to snap up dollar securities, and with the country’s borrowers obliging, the Asian dollar-bond market is effectively being transformed into a Chinese operation.

Within as few as three years, about 80 percent of the Asian market outside Japan is likely to be Chinese, according to Goldman Sachs Asset Management.

Strategists forecast that by then, its size will have surpassed US$1 trillion.

News on the plans comes little more than a week before a pivotal Chinese Communist Party leadership gathering, and underlines the government’s confidence that there will be strong demand, despite China’s two sovereign rating downgrades this year.

S&P Global Ratings cut China’s credit rating by one notch, following Moody’s Investors Service, which did the same in May.

“It will certainly have scarcity value and I imagine it will be snapped up pretty quickly,” said Geoff Lewis, Hong Kong-based senior strategist for Asia at Manulife Asset Management, of China’s sovereign bonds in an interview with Bloomberg Television.

“It’s a clear sign of China’s determination to move into the international financial markets” and play a role “commensurate with the size of its economy,” he added.

The ministry yesterday said that it would sell US$1 billion of five-year notes and the same amount of 10-year debt “soon.”

Most Asian dollar bonds nowadays are sold outside the US and China has not specified which rules will govern its sovereign issue, although the ministry did say the bonds would be listed on the Hong Kong Stock Exchange.

When Postal Savings Bank of China Co (中國郵政儲蓄銀行) sold US$7.25 billion of US dollar debt last month, only 3 percent went to non-Asians.

That deal was the biggest since a jumbo sale by Alibaba Group Holding Ltd (阿里巴巴) in 2014.

Anticipation of strong appetite for China’s new issue had already started reducing the premiums for Chinese issuers, strategists said last month.

As for the sovereign bonds themselves, South Korea’s offshore government debt is a key point of comparison, and tighter pricing than its Asian neighbor’s securities would be a further feather in China’s cap.

South Korean US dollar bonds due in September 2023, currently the closest to a five-year note, yield about 84 basis points over US Treasuries, data compiled by Bloomberg showed.

South Korea, which has a rating two steps above China’s, has notes due in January 2027 that trade 78 basis points over comparable Treasuries.

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