By Wang Yanhang Source: Global Times Published: 2018-10-16
On Thursday, China successfully issued $3 billion in sovereign dollar bonds, attracting the attention of the international financial market.
The Chinese Ministry of Finance issued $1.5 billion worth of five-year notes with nominal interest rate at 3.25 percent, $1 billion in 10-year notes at 3.5 percent, and $500 million in 30-year bonds at 4 percent in the Hong Kong Special Administrative Region. Several hundred cornerstone investors were drawn to the bonds, including central banks and monetary authorities from multiple countries and regions, sovereign wealth funds, large international commercial banks, investment banks, insurance companies, trust companies and asset management companies.
This bond issuance was notable for several reasons. First, China was able to raise money as cheaply as some of the most solid US companies such as Apple and Microsoft. Five- and 10-year notes sold at only about 0.3 percentage point higher than US Treasury bonds, and 30-year notes were 0.7 percentage point higher. The fact that the spread between China's dollar bonds and US Treasury bonds was so close shows the vitality of the Chinese economy.
Moreover, this is the second time since 1997 that China has issued bonds with a long maturity of 30 years, and back then only $100 million worth of bonds were offered.
Third, the sovereign dollar bonds were offered without a rating. China has bypassed the international rating agencies to get a quote directly from the market. In 2017, Moody's and Standard & Poor's (S&P) downgraded China's rating. A great deal of Chinese companies financing or borrowing overseas depend on the rating given by those agencies, and companies that need to raise money are controlled by them and at their mercy. However, the agencies often have their fair share of prejudices and inaccurate judgments, especially toward the Chinese economy and its resilience, growth engine and direction. The rating agencies also have trouble seeing the forest for the trees, often failing to see the economic fundamentals and development potential within China.
Fourth, the dollar bonds were popular, and the bonds were subscribed quickly amid the selloff market, proving that overseas investors have confidence about China's solvency. It also reflects the belief that the Chinese economy will continue to thrive and sustain healthy growth. In addition to abundant foreign reserves and a trade surplus, the Chinese economy still looks appealing to investors, whose demand for Chinese bonds remains strong.
The dollar bond sale indicates that the value of the yuan remains stable. The dollar bonds were marketed against the backdrop of global trade frictions created by the US and the resulting global market turbulence and massive capital outflows from emerging markets. The yuan's recent moves still pale in comparison with fluctuations in other emerging market currencies, signifying the yuan's stability.
It also points to a new fundraising paradigm. The issuance of dollar bonds shows that Chinese institutions can easily raise money at low cost by selling dollar-denominated debt, thereby offering a new paradigm for Chinese offshore bond pricing that helps to lower the borrowing cost for Chinese companies.
Furthermore, the successful bond issuance serves as a hedge against bleak sentiment resulting from the recent global market rout. With Chinese sovereign bonds priced at high levels by international investors who have used funds to vote in favor of the Chinese economy, it is evident there is optimism about the continued improvement and the long-term healthy development of China's economy.
The author is a senior fellow with the Chongyang Institute for Financial Studies at Renmin University of China and former deputy secretary-general of the China Banking Association.