China Prepares Sale of $2 Billion in U.S.-Dollar Bonds

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09/13/2017 | 09:00 am


By Manju Dalal and Carolyn Cui



China is laying the groundwork for its first sale of U.S.-dollar sovereign bonds in more than a decade, a move toward expanding its ties with global investors as its economy improves.



The government is preparing to sell $2 billion in bonds this month, and investment banks are pitching for a role in the deal, according to bankers in Hong Kong.



While the planned sale isn't large and is mostly symbolic, it would be China's biggest-ever U.S.-dollar bond sale and its first since October 2004, when the country raised a total of about $1.7 billion from selling dollar- and euro-denominated bonds that matured in five and 10 years.



China's Ministry of Finance didn't immediately respond to requests for comment.



China has about $200 million in outstanding U.S.-dollar sovereign-debt issues that it is scheduled to pay off in 2027 and 2096, and those bonds yield about 3.3% and 4% respectively, according to research firm CreditSights. The country issued several global bonds in the 1990s, including a 100-year $100 million bond in 1996 with a 9% coupon.



But the government has been largely absent from the market since 2004, as officials were coping with a continuous influx of "hot money"--sudden rushes of investment flows--and a rapid buildup of foreign reserves.



The bond sale is coming as the cost of insuring Chinese government debt against default in recent months has fallen to its lowest level in two years, according to data from IHS Markit. It costs $58,000 annually to protect $10 million of Chinese debt from default over five years, versus $100,000 in September 2015. Some investors use these so-called credit default swaps to hedge their holdings of Chinese debt investments. Falling costs of protection indicate lower investor anxiety about the possibility of a financial crisis developing in China.



CreditSights said in a note last week that the new Chinese sovereign bonds could be priced to yield 0.5 percentage point over comparable Treasury securities. The five-year Treasury note recently yielded 1.747% while the 10-year Treasury was yielding 2.171%.



Most buyers of the new U.S.-dollar bonds are expected to be Chinese investors and financial institutions, say analysts and bankers. Overseas investor demand for Chinese debt has been generally lackluster, despite stepped-up efforts by Beijing to attract foreign buyers to its bond market. Concerns over the value of China's currency and the country's overall debt burden have kept many foreign investors on the sidelines.



Still, a successful sovereign-bond sale could signal investor confidence in China's economic growth and its creditworthiness. The deal is likely to hit the market ahead of China's Communist party Congress, which next month will chart the path of the country's leadership.



Plans for the sale have been in the works for some time.



In June, shortly after Moody's Investors Service downgraded China's sovereign rating by a notch to A1 from Aa3 citing concerns about rising debt and slowing economic growth, China's Ministry of Finance announced plans to sell $2 billion in bonds in the second half of this year.



The coming offering would be a first step toward building a liquid benchmark yield curve that could eventually help lower the cost of funding for Chinese companies, including state-owned enterprises, banks and private corporations.



"In an environment where assessments of China's debt issues have been pretty adverse, the result might be quite positive for them and, by extension, for the valuation of Chinese assets," said Edmund Harriss, a London-based portfolio manager of the Guinness Atkinson Renminbi Yuan and Bond Fund.



In the offshore market, Chinese companies and local governments are active borrowers, raising a total of $379.7 billion year to date through bond issues, according to Dealogic. In 2016, they raised $855.1 billion. Chinese bonds delivered a 4.93% return for the first eight months, making them a laggard in emerging markets this year.



Yifan Xie and Shen Hong contributed to this article.



Write to Carolyn Cui at [email protected]





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