China has done it again. It captured the market’s attention at the end of last week with a triple-tranche $3bn bond outing. But all the attention it garnered was not necessarily for the most positive reasons.
When the Ministry of Finance sold a $2bn deal last October — its first dollar issuance since 2004 — it excited bankers and investors with its rarity value and ultra-tight pricing. But this time, the focus was more on the negative headlines around trade tensions with the US, as well as the deal’s rather unfortunate timing.
The market took a turn for the worse just before China ventured out, as global stocks crashed.
Few had foreseen this, but China went ahead with its deal nevertheless, in an obvious attempt to prove it had market access despite the noises, growth concerns and turmoil. It raised the targeted $3bn while extending its curve to 30 years.
But its triumph came with sacrifices, and showed what a difference a year can make. Compared to its 2017 offering that was more than 10 times subscribed, China only had a final order book 4.4 times the deal size this time. And although most market participants thought pricing was fair, the jaw-dropping low spreads achieved just a year ago — 15bp over US Treasuries for a five year bond and 25bp over for a 10 year — simply could not be replicated.
The MoF will never admit it, but its new deal certainly did not come with the same fanfare that surrounded its 2017 trade. But this could very well be a blessing in disguise for the rest of the China dollar bond market.
With foreign exchange reserves that easily cover its foreign currency external debt stock by more than 2.5 times, China has long made clear its reason for tapping the offshore capital markets — to establish a benchmark for quasi-sovereign issuers, state-owned enterprises (SOEs) and some financial institutions, potentially helping them to achieve lower funding costs.
China’s 2017 fundraising didn’t quite manage that: while the spreads on quasi-sovereigns and SOEs did tighten in the lead up to, as well as after, the pricing of those bonds, that tightening was artificial and unsustainable. China had been away from the offshore market for far too long, and the pricing was too aggressive.
The level this year — although still unreachable by other Chinese issuers given the market conditions — is a more realistic indication of the China risk. The government’s five, 10 and 30 year notes were issued at spreads of 30bp, 45bp and 70bp over US Treasuries, respectively. This is a step in the right direction to establishing that much-needed benchmark.
That is not nearly enough, however. There is a lot the sovereign can, and should, learn from its Asian peers such as South Korea and Indonesia. Building a full curve is just the first step; but tapping the market more regularly and maintaining liquidity in that curve is more important.
Flexibility and the ability to adapt are also other virtues shared by savvy Asian sovereign issuers, which have proven time and again that there is nothing wrong in being opportunistic when it comes to a bond offering.
China should consider taking a leaf out of their books. But more critically, it needs to focus less on making its deals seem like political statements, and more on exploring how it can maximise the outcome and impact of its international debt issuance.