China plans first dollar bond since 2004

Nation is expected to target a 60-to-70 basis point premium over US Treasuries

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 $2 billion (Dh7.35 billion) issue pending from the Ministry of Finance is seen by market players as a move to pull down the borrowing costs of Chinese stateowned 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.

Asian benchmark

“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 Ltd. “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 LLC 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 policymakers’ initiative to reduce leverage in the financial system. While China’s government has no need of extra dollars, given its $3.09 trillion 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.