It’s been a record year so far for Asian 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 $2bn 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.
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 dollar bond market for years to come to help fund their international operations.
And with President Xi Jinping encouraging expansion abroad through his Silk Road development project, there’s set to be plenty of financing needs.
“China’s upcoming dollar bond will become the most important Asian benchmark bond,” said 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 is only likely to proceed if the interest costs are less than those of South Korea, according to analysts including 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, a number of analysts said; South Korean five-year dollar debt spreads averaged around 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 didn’t 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 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,” says Leung at Wells Fargo. If China succeeds in its tight target for pricing, the sovereign sale could end up bringing down borrowing costs for Chinese issuers by about 30 basis points, Leung said.
Domestic players are keeping a watch on the sale, having witnessed rising yields thanks to policy makers’ initiative to reduce leverage in the financial system.
While China’s government has no need of extra dollars, given its $3.09tn stockpile of foreign-exchange reserves, the offshore bond will offer a marker for international demand just months after a new channel for buying mainland debt opened up via Hong Kong.
“After such a long pause, the pricing this time would be interesting, especially given the overseas investors’ attention to China’s leverage issue and the Moody’s downgrade,” said Shen Bifan, head of research at First Capital Securities Co’s fixed- income department in Shenzhen. “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 about 60 basis points this year, to 3.61% on Friday. US Treasuries with similar maturity have dropped about a quarter percentage point, to 2.20%.
The $2bn expected issue compares with some 2.4tn yuan ($366bn) worth of domestic central government debt issuance so far this year, according to data compiled by Bloomberg. China has a total of 12.3tn yuan of bonds outstanding, and still has $100mn of dollar bonds due in 2027 that were sold in 1997 and a $100mn of dollar century note due 2096.
Another potential effect of China’s issuance could be to spur other Asian countries to come to the dollar market, analysts said.
Hu at Invesco said investment-grade companies in Malaysia, South Korea and Thailand, as well as their governments, could be encouraged if China secures beneficial pricing.
The expected new sale is already starting to reduce yields among some Chinese issuers, according to Jethro Goodchild, the Singapore-based head of Asian credit at Aviva Investors. State-run oil giant China Petroleum & Chemical Corp priced a four-part dollar debt sale totalling $3.25bn earlier this month at spreads tighter than a comparable offering back in April. He sees further tightening in quasi-sovereign debt spreads after the sale.
Bank of America Merrill Lynch expects SOE oil bonds to outperform, getting a lift from the sovereign offering to narrow their spread gap with the US peers, according to a September 13 note from the bank.
“Sovereign bonds are to a certain extent are marketed like companies – there’s a story to tell and sell,” said Todd Schubert, head of fixed-income research at Bank of Singapore, the private banking unit of Oversea-Chinese Banking Corp. “It will be an opportunity for the Chinese government to create the image in investors’ minds that they have a coherent and well-articulated plan for the country’s economic growth and fiscal stability.”
Pedestrians walk past China’s Ministry of Finance in Beijing. The $2bn dollar bond issue pending from the ministry is seen by market players as a move to pull down the borrowing costs of Chinese state-owned enterprises.