China plans return to global market with US$ bonds

$2.7b issue seen as a move to pull down borrowing costs of state-owned enterprises

BEIJING • It has been a record year so far for Asian US-dollar bonds, with unprecedented demand from within the region spurring a slew of debut issuers and prompting some deals that raised questions about due diligence. Still to come: the most important sale yet.

China's government itself is planning a return to the market for the first time since 2004, even though it hardly needs the funds, given its ample ability to raise cash at home.

Instead, the US$2 billion (S$2.7 billion) issue pending from the Ministry of Finance is seen by market players as a move to pull down the borrowing costs of Chinese state-owned enterprises (SOEs). 

With the internationalisation of its own currency on a longer timeline than originally anticipated - thanks to the currency devaluation that shocked global markets in 2015 - SOEs such as China's energy and transport companies are likely to be tapping the US-dollar bond market for years to come to help fund their global operations.

And with President Xi Jinping encouraging expansion abroad through his Silk Road development project, there is set to be plenty of financing needs.

"China's upcoming dollar bond will become the most important Asian benchmark bond," said Mr Ken Hu, chief investment officer for Asia-Pacific fixed income at Invesco Hong Kong.

"It will help reprice Chinese dollar bonds - especially investment grade and SOEs."

China will likely proceed only if the interest costs are less than those of South Korea, said Mr Anthony Leung, director of Asia-Pacific credit research at Wells Fargo Securities in Hong Kong.

China is expected to target a 60- to 70-basis-point premium over US Treasuries, some analysts said; South Korean five-year US dollar debt spreads averaged about 67 basis points last quarter.

Tighter pricing would be a mark of success, given South Korea's long-term foreign-currency issuer rating is two notches higher than China's according to Moody's Investors Service.

The Ministry of Finance did not respond to a faxed request on its pricing target and the timing of the bond sale. The government probably decided to come to market now because many of the country's SOEs have issued debt in US dollars but lacked a sovereign benchmark for their securities, market participants say.

"SOEs need to fund themselves in the open market, but it doesn't mean the government cannot help set a benchmark to give them a hand," said Mr Leung.

If China succeeds in its tight target for pricing, the sovereign sale could end up lowering borrowing costs for Chinese issuers by about 30 basis points, Mr Leung added.

First Capital Securities' head of research Shen Bifan said: "After such a long pause, the pricing this time would be interesting, especially given overseas investors' attention to China's leverage issue and the Moody's downgrade.

"Having said that, it's also worth noting, given the very small amount of offering and non-regular sales, it may not be an efficient price discovery."

Yields on China's onshore 10- year government bonds have climbed 60 basis points this year to 3.6 per cent on Thursday. US Treasuries with similar maturity have dropped about a quarter percentage point to 2.18 per cent.

The US$2 billion expected issue compares with some 2.4 trillion yuan (S$493 billion) worth of domestic central government debt issuance so far this year, Bloomberg data shows.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on September 16, 2017, with the headline 'China plans return to global market with US$ bonds'. Print Edition | Subscribe