China is not one to make a move without making an impact. But when it comes to the country’s return to the dollar market, it’s not clear what that impact will be. While China’s reserves were under pressure not too long ago, it now has more than $3tr of foreign reserves, so it certainly doesn’t need the $2bn it is likely to raise.
The proposed size is modest for China, making it seem almost not worth the effort. And despite Moody’s downgrading the country’s rating to A1 from Aa3 in May, the market doesn’t seem to think a new transaction will have much of a ratings impact either.
The new issuance could set a worthwhile benchmark for Chinese corporations, and in particular state-owned enterprises (SOEs), desperate for offshore funding. With the sovereign resetting the benchmark for price guidance, these issuers could reduce future funding costs. That in itself makes sense, but while China seems to be aiding corporate borrowers with one hand, it’s also been restricting outbound investments with the other.
The country’s regulator has been notoriously hard on issuers seeking approval to issue offshore notes this year. China’s aggregate non-financial outbound investment between January and August was $68.7bn, down 41.8% year-on-year, according to the latest statistics from the Ministry of Commerce. Likewise, China loves stability, and with the 19th National Congress of the Communist Party scheduled for mid-October, it’s unlikely the country will suddenly encourage more offshore issuance this year.
In a chicken-and-the-egg cycle, China’s sovereign bond itself could end up being pegged to existing SOE paper, leaving it unlikely to reset the benchmark for those borrowers in a substantial way.
The sovereign could still pull off a notable deal, if it thinks big. The proposed $2bn will not exactly be a statement bond from the biggest debt market in Asia. Should China push to a stunning size, or, better yet, push for a statement-making tenor, like a century bond, the transaction could still be the market-mover China undoubtedly wants it to be.
China doesn’t need to worry about grabbing headlines with its new dollar notes, as it will do so merely for being such a rarity in the debt market. But there is a real risk the deal falls short of its potential.
As it stands, the sovereign’s befuddling timing with the transaction looks more like the product of delayed bureaucracy than the smart planning of a savvy issuer.