China’s bond debut: a lesson in maturity

China’s ability to lock in a $2bn tightly priced bond sale last week after a 13 year hiatus from the market comes as little surprise. But the price that China received, and the statements it made with the sale are worth talking about. This triumphant dollar bond return not only squeezed bond prices to new lows, but it also allowed China to prove that it does not need foreign investors — it wants them.

  • By Morgan Davis
  • 01 Nov 2017
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For a country with trillions of dollars in its reserves, it was evident from the start that China wasn’t selling a bond because it needed to. And China’s messages were clear. For a sovereign that saw its credit rating downgraded by two agencies this year, China has a stable economy that is a global force to be reckoned with.

China’s government seized headlines globally earlier in October during its 19th National Party Congress. The meeting of the country’s most powerful men drew eyes to China’s intentions to continue on the path of global power and spreading influence. If projects such as the Belt and Road initiative didn’t make that evident enough, China pushed out its dollar bond sale right after the Congress closed.

One thing is certain, it won’t be another 13 years before China returns to the offshore bond market. After the dollar deal wrapped, Shi Yaobin, China’s vice minister of finance, was quoted in local media reports saying that the country is looking into the continued sale of non-renminbi bonds. China is a different place than it was a decade ago, and the market is mature enough to know its necessary next steps.

Tighter curves 

Everyone expected the price of the China bonds to pierce the South Korean sovereign curve, but few people expected it to trade as close to US Treasuries as it did. Since the deal was announced in June, the Chinese offshore bond curve reset, pulling pricing tighter for all of the country’s issuers. The fantastically tight spreads seen by Asian issuers the day after the bond sale have since abated, but the tightening that began earlier this year still holds, and won’t go away anytime soon.

The strength of the Chinese market and its trickle-down effect on the Asian debt market is a helpful and stable force in the face of global uncertainty and political turmoil. With North Korea firing missiles, US interest rates expected to move, and political unrest in Spain, China is proving it can hold its own.

Even more crucially, China could have priced its bonds even tighter, pushing flat to the US Treasuries curve by forcing Chinese banks to buy the full $2bn, had it really wanted to. Instead, China proved ready to give up a few basis points in exchange for a more diversified investor base.

In the end, 52% of the five year bond was allocated to Asian investors, and about 47% of the 10 year bond went to Asia. The sovereign could have done more to bring in US investors, had it chosen to pursue a 144A transaction instead of a Reg S offer, but the deal was only $2bn, leaving little need to do so.

Strong statement

Other Chinese issuers, particularly the big banks, would do well to follow China’s example. The market often bemoans China buying China. That trend isn’t going to go away, but Chinese issuers would do well to diversify their investor base. The Chinese bank additional tier one deals that have flooded the market in recent weeks rarely release deal statistics after pricing, but it’s evident that nearly all of the issuance is going straight to other Chinese banks. For banks it is a dangerous game to play, relying on ones’ peers to buy each other’s paper and suppress spreads.

With great power comes great responsibility, and China is no exception. The sovereign made a number of important statements with its new issuance. Some were tit-for-tat, like the decision to leave the bonds unrated as clear retaliation for Western rating agencies’ downgrading the country this year. But others can serve as strong indicators of the maturation of the Chinese bond market.

Should the country’s issuers continue to push further to sell smart, diversified deals, it will only help the country and the Asian market. 

  • By Morgan Davis
  • 01 Nov 2017

Panda Bonds Top Arrangers

Rank Arranger Share % by Volume
1 Industrial and Commercial Bank of China (ICBC) 35.00
2 China CITIC Bank Corp 30.00
3 China Merchants Securities Co 17.00
4 HSBC 5.00
4 Standard Chartered Bank 5.00

Bookrunners of Asia-Pac (ex-Japan) ECM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Goldman Sachs 5,061.71 11 11.32%
2 Huatai Securities Co Ltd 3,404.45 12 7.62%
3 Citi 2,574.12 16 5.76%
4 UBS 2,554.62 13 5.71%
5 CITIC Securities 2,314.61 9 5.18%

Bookrunners of Asia Pacific (ex-Japan) G3 DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 4,546.69 36 7.39%
2 Citi 4,069.98 24 6.62%
3 Goldman Sachs 3,658.91 12 5.95%
4 JPMorgan 3,357.93 14 5.46%
5 Morgan Stanley 3,085.35 21 5.02%

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