China’s about to sell US dollar bonds

US Treasury yield spikes and on-going trade war making investors cautious

HONG KONG: A year after its first sovereign sale of US dollar bonds in well over a decade, China’s about to tap that well again. This time around, the reception isn’t likely to be quite as enthusiastic.

The US$3bil issuance of five-year, 10-year and 30-year securities, due today, follows a jump in yields on benchmark Treasuries, and a slump in the yuan against the dollar thanks in part to China’s deepening trade-war with the US.

While the Finance Ministry hasn’t identified a purpose for the sale, underwriters had long expected a follow-up to last year’s US$2bil deal to help build out a benchmark yield curve for Chinese offshore borrowers.

“Market conditions are quite different from last year,” said Anne Zhang, executive director for fixed income, currencies and commodities at the private banking arm of JPMorgan Chase & Co in Hong Kong.

“The ongoing trade war, US Treasury yield spike, coupled with emerging-market volatility and anticipated dollar-bond supply ‘till year-end are all making investors take a more cautious view” and press for a bigger premium on the sale, she said.

The likelihood of a bigger spread over benchmark Treasuries is based in part on secondary trading in the securities sold last year, which drew orders for about 11 times the amount on offer.

The premium on the 10-year tranche was at 41 basis points in Asia trading yesterday, after being priced at 25 basis points, according to data compiled by Bloomberg.

Even with a wider spread, the sale could help to limit damage to a Chinese offshore dollar-debt market that’s grown to roughly US$700bil as investors question the outlook for China’s securities.

Chinese issuers have sold US$125bil of dollar bonds so far this year, on course for a slowdown from US$208bil for all of 2017.

“It’s still better to have a sovereign-benchmark anchor in the global market – especially amid the current emerging-market turmoil and ongoing trade tension,” said Hong Hao, chief strategist at Bocom International Holdings Co in Hong Kong.

Hong expects the sale to help lower the funding cost for higher-rated Chinese companies.

They could use the help – Chinese corporate bonds handed investors a 2% loss in the first half of 2018, the worst since 2013, when emerging markets were hit by the taper tantrum, ICE Bank of America Merrill Lynch data show.

“There is an element to geopolitics at play with the timing of China’s sovereign issuance of dollar bonds,” said Paul Lukaszewski, head of Asian corporate debt & emerging market credit research at Aberdeen Standard Investments in Singapore.

“China wants to demonstrate to all observers that it has easy access to dollar funding at very low costs.”