Bond issue, though unrated, is eagerly snapped up
International investors stamped their approval on China’s 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’s 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.
"The 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's economic development," said Lian Ping, chief economist at the Bank of Communications. "The bond offering can help improve the currency and term structures of China's sovereign debt.”
China's 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.
"This issue demonstrates China’s 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,’” said Peter Wong, deputy chairman and chief executive of HSBC Asia-Pacific.
"It also reinforces Hong Kong’s position as a key financial center for Chinese issuers raising debt capital, especially for ‘Belt and Road’ projects,” he added. “It should enhance market liquidity in Hong Kong through the eligibility of these bonds for repo transactions in the local interbank system."
The new sovereign bonds may also help improve the confidence of overseas markets in China's economy and sovereign credit. They were issued without a rating from global credit-rating agencies.
China's credit rating was cut this year by Moody's and Standard & Poor's. Moody’s lowered its rating to “A1” from “Aa3,” and S&P dropped its rating to “A+” from “AA-.” Some observers said the decision highlighted the bias of the two agencies in assessing debt according to Western standards.
"The rating agencies didn't have a full understanding of the development path, growth pattern and characteristics of the Chinese economy,” Lian said. “They overlooked the great potential and sound fundamentals of the economy and the government's ability to manage financial risk.”
Hong Kong Chief Executive Carrie Lam said the result of the debt issue showed that sovereign bonds provide a robust, high-quality investment.
"Hong 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," 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 “AAA” S&P rating.
"Everyone wants to get their hands on this bond,” said Edmund Goh, fund manager of Aberdeen Standard Investments. “These are tight levels, but we are interested because there is little risk of repeated issuance in the same maturity bucket."
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 China's 19th Communist Party Congress, which set a course of stable economic growth.
“In 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," Lian said.