“Over 150 international players, including public sector investors, insurers and global fund managers, were involved in the deal outside the Chinese players. They like the China growth story and see value at the price levels,” said Chao Li, head of Asia bond syndicate at Standard Chartered, one of the lead managers on the deal. About 50% of the deal was sold outside Asia into the EU and to offshore US investors. While China for years had sought to reduce the role of the US dollar in the global financial system, its approach has evolved since a flubbed devaluation of the yuan in 2015 that showcased to its officials the dangers of allowing global market forces greater rein.
In a “if you can’t beat them, join them,” move, Chinese entities are now selling dollar bonds in record amounts, tapping their own holdings of dollars accumulated from current-account surpluses. The sovereign bonds traded tighter in the secondary market on Friday following pricing, according to traders, who asked not to be identified.
The surge in issuance – some $147bn so far this year – in turn helped to prompt the Finance Ministry to sell sovereign securities to serve as a benchmark that could help reduce borrowing costs for state-owned and quasi-government enterprises. Indeed, the prospect alone of these notes already started reducing corporate yields weeks ago.
The demand for the bonds suggests China would have plenty of scope to build out a full yield curve of securities in the US currency if it wanted, to serve as a benchmark for its state-owned and quasi-government issuers. China’s finance ministry said in a statement on its website that total subscriptions for the sale amounted to $22bn.
“Twobn dollars is a mere drop in the ocean of the potential appetite globally for these bonds,” said Jethro Goodchild, the Singapore-based head of Asian credit at Aviva Investors. One potential use of dollar bonds sold by state enterprises and banks is funds for President Xi Jinping’s signature global initiative – the “belt and road” project designed to deepen economic ties between China and Asian, European and African nations. The yuan still makes up a minority of China’s trade, emphasising the role of the dollar.
Somewhat unusually, China didn’t seek a specific rating for the notes it sold, in a move that investors took to be a retort to the sovereign downgrades that Moody’s Investors Service and S&P Global Ratings announced earlier this year. In each case, officials disputed the moves. “The $2bn issuance just sends a signal that China disagrees with the rating downgrades,” said Anne Zhang, executive director for fixed income, currencies and commodities at JPMorgan Private Bank in Hong Kong. “There might be more first-time issuers considering selling without a rating, but it’s not because the sovereign came without a rating, it’s because there is enough demand.”
Within as few as three years, some 80% of the Asian market outside Japan is likely to be Chinese, according to Goldman Sachs Asset Management. The vast majority of sales nowadays are taken up by Asian buyers. For example, when Postal Savings Bank of China Co sold $7.25bn worth of dollar debt last month, only 3% went to non-Asians. “The new issues provide liquid benchmarks and pricing reference points for the continued new issuance we expect to see across the Chinese credit curve in the coming months,” said James Arnold, head of debt syndicate for Asia Pacific at Citigroup, a lead manager on the sale.