China Sells Dollar Bonds at Yields Near Treasurys -- WSJ

By Manju Dalal and Carolyn Cui Features Dow Jones Newswires

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 27, 2017).

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China sold $2 billion in bonds at record-low interest rates that were slightly above what the U.S. pays to borrow in the debt markets, a sign of investors' confidence in the financial health of the world's second-largest economy.

A surge of investor demand for the country's first U.S. dollar-denominated debt sale in 13 years enabled China to price its five-year bonds to yield 2.196%, or just 0.15 percentage point over comparable U.S. Treasury notes at the time of the pricing.

The country's 10-year bonds were priced to yield 2.687%, or 0.25 percentage point above Treasury yields. Bankers received more than $20 billion in investor orders from investors and allocated a third of China's bonds to investors in Europe. The bulk went to Asian institutions, and some were purchased by investors in the Americas.

The bond sale, which followed this week's conclusion of China's twice-a-decade Communist Party congress, was carefully managed to achieve an outcome that would send a strong message about China to the global markets.

The $2 billion offering was small by the standards of the U.S. and other major sovereign-debt issuers. Coupled with China's long absence from the global capital markets, it created a scarcity value for the country's bonds. Many investors, led by Chinese institutions with dollars to invest outside the mainland, were eager to own the securities, and they helped push down yields, which move inversely to prices.

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"Investors' view of China is at its strongest point" in years, said David Loevinger, managing director of Emerging Markets Sovereign Research at TCW Group, referring to what he called "super-tight spreads" on the new bonds.

With China's new leadership in place and U.S. President Donald Trump preparing to visit Beijing, "China wants to show that it is an equal power to the U.S.," Mr. Loevinger added.

China had said it has no significant need for external financing. The country runs a large trade surplus and has over $3 trillion in foreign-currency reserves, including a big stash of U.S. Treasurys.

The main goal of the bond sale was to create low interest-rate benchmarks that Chinese state-owned enterprises and private corporations, which are more-regular issuers of offshore debt, can reference when tapping the global bond markets for funding needs.

China had tapped 10 large banks, including Bank of China Ltd., Citigroup Inc. and HSBC Holdings PLC, to help drum up buyers for its sovereign bonds. The securities were marketed primarily to investors in Asia and Europe.

Some investors were turned away by the meager yields offered by China. Edwin Gutierrez, head of emerging-market sovereign debt at Aberdeen Standard Investment, which has $758 billion of assets under management, said he passed on the China deal.

"This is not targeted for me," Mr. Gutierrez said, noting that the average yield on emerging-market bonds is in excess of 5%. If he bought the Chinese bond, it would be "an incredible yield give-up for global emerging-market managers like me," he said.

Earlier Thursday, banks circulated price guidance for the securities, launching the five-year bond sale at suggested yields of 0.3 to 0.4 percentage point above Treasurys. They offered China's 10-year bonds at 0.4 to 0.5 percentage point over the U.S. yield benchmark. By the afternoon in Asia, strong investor demand led bankers to move their yield guidance closer to Treasury yields. It is a common strategy for bankers to initially offer more generous yields and later sell the debt at much lower yields to demonstrate that strong investor demand enabled issuers to pay less in borrowing costs.

The bond sale follows credit-rating downgrades of China this year by international ratings firms Moody's Investors Service and S&P Global. Both grade the country the equivalent of an A+ rating, which is several notches below their rating on the U.S., and the raters have pointed to what they consider rising economic and financial risks in China.

China's Finance Ministry has pushed back hard against the raters' assessments, arguing its economy is stable and gathering momentum. It proceeded with its bond sale without getting the securities rated, and in a statement this week said the international raters have misread China's economic development and growth potential. It said investors in the international debt markets would make an objective assessment of China's creditworthiness.

In marketing China's bonds earlier this week, investment bankers provided several 10-year yield benchmarks that investors could use to compare the country's relative risk. The comparisons included 10-year U.S. dollar bonds issued by Israel in September 2016, which were recently yielding 0.41 percentage point above U.S. Treasurys. Israel has the same credit rating as China.

Another benchmark for comparison was German government-backed development bank KfW Group, which in April 2015 issued $3 billion in U.S. dollar bonds. Those securities recently yielded 0.05 percentage point over 10-year U.S. Treasurys. Germany has triple-A credit ratings from the major ratings firms.

Some analysts said the comparisons were surprising because they were made against U.S. dollar bonds from a different region.

China's bonds are "turning out to be unconventional in every way," said Anne Zhang, executive director for fixed income, forex and commodities in Asia at J.P. Morgan Private Bank.

A two-hour investor meeting on Wednesday at Hong Kong's Monetary Authority drew dozens of investors in the city while many from overseas dialed in by phone. At the meeting, Hong Kong Financial Secretary Paul Chan said he intends to pass a bill that would provide a tax exemption for investors who purchase the bonds. A senior official from China's Finance Ministry also took questions from investors, according to an attendee.

The bond sale was engineered to be successful, and "proves a point to the world" that China can sell its debt cheaply without credit ratings, said Alicia Garcia Herrero, chief economist for the Asia Pacific at Natixis.

Some investors remain skeptical about China's outlook. "China hasn't slayed its demons of too much leverage and too much dependence on the property market," said Mr. Loevinger of TCW. "But those risks seem to have been pushed aside for the time being."

China is the latest among dozens of developing countries that have tapped the international bond market, where investors' thirst for higher yields has sparked record issuance of U.S. dollar-denominated debt this year. Earlier Thursday, Mongolia, which has a "junk" credit rating, raised $800 million by selling 5.5-year U.S. dollar bonds that pay 5.625% in annual interest. The country had originally set out to raise $650 million, but raised the issue's size after seeing strong investor demand.

--Nina Trentmann contributed to this article.

Write to Carolyn Cui at carolyn.cui@wsj.com

(END) Dow Jones Newswires

October 27, 2017 02:47 ET (06:47 GMT)