China is planning a record sale of sovereign bonds in dollars, with a potential $6 billion offering, according to people familiar with the discussions.
The Ministry of Finance is considering tenors of three years, five years, 10 years and 20 years, according to the people, who asked not to be named as the talks aren’t public. The ministry didn’t immediately respond to a request for comment.
This marks the third straight year for China to issue dollar debt, and underscores the nation’s continued interest in building out an offshore market where its companies and local authorities can tap funding. The 20-year note will fill a gap between 10-year and 30-year securities issued in 2018.
“It reaffirms China’s determination to develop an orderly offshore dollar bond market for Chinese issuers,” Anne Zhang, head of fixed income for JPMorgan Private Bank in Asia, said of the offering. “The new deal will further complete a sovereign curve,” she said.
China’s sale is planned for as soon as Tuesday, the people familiar with the discussions said. It follows the country’s first euro bond in 15 years — which saw blowout demand among investors eager to snap up securities with positive coupons amid a swathe of negative-yielding debt.
A $6 billion dollar issue would be double the size of last year’s, and triple the amount sold in 2017, when China resumed issuing sovereign dollar debt for the first time since 2004.
The Chinese dollar bond market now exceeds $740 billion, according to data compiled by Bloomberg, and is both a key source of funding for domestic borrowers and an outlet for investing Chinese foreign-currency deposits.
Issuance dipped in 2018 after a record 2017, hurt in part by depreciation of the yuan as the U.S.-China trade war erupted. But sales have rebounded this year as U.S. Treasury yields came down. The yuan has also stabilized in recent weeks, following the resumption of Sino-American trade negotiations.
Chinese borrowers have issued $195 billion of dollar bonds so far this year, a record pace, according to data compiled by Bloomberg. The all-time high for a full year was $211 billion in 2017.
Builder Binge
Investment-grade securities account for about 53% of Chinese dollar bonds, with high-yield notes at 38%. Property developers have racked up record issuance of $78.5 billion this year.
While China has the world’s second-largest bond market, in some ways it remains relatively underdeveloped, according to Becky Liu, head of China macro strategy at Standard Chartered Plc in Hong Kong. The country is still building out a domestic institutional investor base such as the pension funds and insurers that are a major feature overseas. Banks are the main holders of bonds onshore.“There is a good number of companies that do not have a funding channel at home,” Liu said. That’s why even domestic-focused enterprises can tap the dollar-debt market, she said.The record China sale isn’t huge relative to some other sovereign issues. Italy sold $7 billion of dollar bonds last month. Argentina sold $9 billion in January 2018.
China holds the fifth-highest investment grade rating at Moody’s Investors Service, S&P Global Ratings and Fitch Ratings. That’s below South Korea, though on par with Japan, Moody’s and S&P scales show. China’s planned bond issue will be unrated.
Bloomberg
