China shows its pull selling dollar bonds in weak market

BEIJING: China knew it would be marketing US$3bil of new dollar bonds in the midst of a trade confrontation and escalation in interest rates engineered by its top rival, the United States Officials might not have reckoned on selling amid a sudden investor flight from risk.

In what’s set to be an even bigger demonstration of China’s pull in the international bond market, initial signs showed little hit to buyer sentiment from the biggest sell-off in world stocks since February and a retreat from credit and emerging markets.

Price guidance on the 10-year note offering, at 65 basis points over Treasuries, was wider than where China’s 2027 dollar bonds were indicated yesterday, but orders so far well exceed the total on sale.

“The bond issuance is more like a vote of confidence in China’s creditworthiness,” said Ziyun Wang, partner and senior portfolio manager at DeepBlue Global Investment Ltd.

Spreads on China’s five-year notes were tipped at 50 basis points, while the debut 30-year offering was quoted at 90 basis points, according to people familiar with the deal who asked not to be identified as they’re not authorised to speak publicly.

Orders for China’s three-tranche issue total more than US$10bil so far, according to people familiar with the matter.

The sovereign’s latest offering comes amid a jump in benchmark 10-year Treasury yields to the highest since 2011, which in turn con- tributed to equity benchmarks tumbling around the world this week. The Shanghai Composite Index was down more than 4%, and Japan’s Topix Index lost more than 3% , in yesterday afternoon trading.

There were signs of stress in the credit world, too.

The cost of insuring Chinese sovereign bonds against default for five years jumped to a three-month high. And Chinese investment-grade bond spreads have widened in response, according to traders.

Also under strain: the yuan, which was down 0.3% in offshore trading as of 12:55pm in Hong Kong yesterday.

When China resumed sales of dollar bonds last year after a hiatus of more than 13 years, market play- ers saw it in part as a move to reduce offshore borrowing costs for corporate Chinese issuers. However, that hasn’t really happened.

“Last year’s offering proved to be the high-water mark in sentiment, and China’s blue chip SOEs have underperformed US credit this year,” said Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group. “This year’s deal may not help reverse that.”

Even so, Angus To, deputy head of research at ICBC International, expects the new bonds to attract strong orders, because they offer an attractive yield pickup over the existing ones.

China sold US$1bil each of five and 10-year bonds in late October 2017.