Breakingviews - Beijing's dollar bonds seek to reprice China risk

People walks on the bund in front of the financial district of Pudong in Shanghai, China July 27, 2017. REUTERS/Aly Song

BEIJING (Reuters Breakingviews) - Beijing’s dollar bonds show how Chinese risk has been repriced. The country is selling $2 billion of five-and 10-year sovereign dollar bonds, the first such issue since 2004. Despite recent downgrades by global rating agencies, these are likely to yield just 30 to 50 basis points above U.S. Treasury bonds. Local banks can guarantee demand if needed, but there is also a genuine reassessment of China risk underway.

China does not need the money, but the borrowing serves multiple purposes. It helps stabilise cross-border capital flows, refills hard-currency reserves, and makes it easier for companies to refinance in dollars, since there will now be benchmark issues to price against. It is also a rebuke to the credit rating agencies, showing China can brush aside their warnings.

It is already a banner year for offshore fundraising. Thomson Reuters IFR says Chinese issuers have sold $108 billion of overseas bonds in dollars, euros and yen by the end of September, already 24 percent above 2016’s full-year record.

For all the hype about the international yuan, it’s naturally easier for Chinese companies to use dollars for overseas acquisitions. Ditto for “Belt and Road” infrastructure investments. But appetite for dollars has come at the expense of the offshore yuan market, once a policy priority. The Ministry of Finance is only selling 14 billion yuan ($2 billion) of so-called “dim sum” bonds in Hong Kong this year, half of the previous year’s issuance.

Even so, this is an unrated issue by a country infamous for credit-fuelled growth, weak rule of law, and selective respect for international norms. It’s one thing to lend money to the Chinese government, but this will serve as a benchmark for pricing debt sales by other Chinese borrowers, some of them far more opaque.

The MoF has previously manipulated offshore bond sales by force-feeding them to compliant Chinese banks. This simulates demand without market substance. This time around, however, the securities may attract more foreign interest: as the mainland economy has recovered, foreign anxiety has genuinely eased. Spreads on Chinese five-year credit default swaps have fallen sharply in 2017, and now trade more than 20 basis points below South Korea’s.


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