China is raising US$6 billion by issuing sovereign bonds, less than a fortnight after it sold euro-denominated bonds. This comes on the heels of its $3 billion issuance in 2018 and a $2 billion sale in 2017 when the sovereign visited the global bond market after a 13-year gap.
The pick up in frequency of China’s visit to the offshore bond markets has to do with the stellar performance of international fixed income products in recent years.
The global bond market has rallied massively since its October 2018 issuance and yields have tumbled quite sharply – the benchmark US 10-year yield has shrunk to 1.79% from 3.2%. Therefore, China can expect to raise funds at a much lower cost.
Which in turn means lower borrowing costs for policy banks and quasi-sovereign issuers which use sovereign bonds as the base for pricing their bonds.
The timing is quite shrewd – the possible cooling of the trade war into the New Year would mean the risk appetite could improve for Chinese government-linked issuers of bonds, especially those that come to the market infrequently. An updated sovereign yield curve would be beneficial for such borrowers.
Bankers said the China sovereign bond issue would target regional investors who held a lot of dollar liquidity, lessening the reliance on US investors, the traditional base eyed by dollar-denominated bond issuers.
China is looking to sell 5-, 10- and 20-year bonds in the issue which is expected to hit the market on Tuesday, according to a Bloomberg report.
“The Chinese govt doesn’t need the money from the bond market – when they do a transaction such as this, I always see it as having a policy objective. It is probably to make the sovereign curve more complete, actively traded and to provide a better benchmark,” said a fixed income strategist.
The demand is expected to be robust along the lines of this month’s euro-denominated bond transaction which received orders of 20 billion euros for a 4 billion offering.