China is planning to sell dollar-denominated bonds for the first time in a decade, as it seeks to take advantage of investor appetite for Chinese credit amid the country’s unexpectedly strong economic growth.
Though the final terms are not yet decided, Beijing is expected to raise up to $2bn, most likely in 10-year notes, according to bankers with knowledge of the thinking. No banks have yet been mandated to carry out the offering, which is expected to be completed in the coming two weeks.
The deal is largely symbolic given that China plans to raise Rmb2tn ($306bn) in total through bond sales this year. Moreover, with $3.1tn in foreign exchange reserves against only $148bn in foreign debt, Beijing has little need for foreign exchange.
Bankers described the sale as an opportunistic move to take advantage of low interest rates and a booming dollar bond market. Deals denominated in the US currency have raised $354bn across the Asia Pacific region this year, according to Dealogic, surpassing last year’s full-year record.
The Chinese government last sold foreign currency bonds in 2004. A successful sale now would also help counter the downgrade of China in May by Moody’s — criticised at the time by the finance ministry, which argued the rating agency had “overestimated the difficulties faced by China’s economy and underestimated the government’s ability to deepen reform”.
The Chinese economy, growing at 6.9 per cent in the first half of this year, is on pace for its first annual acceleration since 2010.
Strategists said that the bond sale would be significant if it were the first in a series of dollar deals of differing maturities that aimed to give Chinese companies a yardstick from which to value their own deals.
“China should have done this a while ago — that is, build a yield curve in dollars for companies to price off,” said Owen Gallimore, credit strategist at ANZ.
Chinese borrowers have this year raised $130bn in dollar bonds, accounting for more than a third of the region’s market.
Mr Gallimore estimated that if China issued five-year bonds, it could pay a premium of 50 basis points over US Treasury rates. If it sells 10-year paper, that premium could reach 65bp. That would imply Beijing paying interest of between 2.27 and 2.84 per cent.
A deal that priced at even lower rates could help China’s biggest state-owned groups and other quasi-sovereign borrowers lower their borrowing costs, too.
“Ideally, if you want a proper curve, you need to have multiple tenors to price all issuances off. But if you’re just testing orders, they may just do 10 years, which is the most liquid benchmark,” said a credit analyst in Hong Kong.
China’s planned deal comes as a series of Chinese companies are rushing to complete deals ahead of next month’s all-important party congress. Postal Savings Bank of China, the country’s sixth largest lender, is planning a $7.6bn sale of contingent convertible (CoCo) bonds.
And Swiss agrochemical producer Syngenta, which was acquired by ChemChina this year, is discussing a multibillion deal with investors as part of ChemChina’s need to refinance short-term loans from the acquisition.