What's behind China's record sale of dollar bonds
Matteo Giovannini
China will raise a record 6 billion U.S. dollars through bond sale. /VCG Photo

China will raise a record 6 billion U.S. dollars through bond sale. /VCG Photo

Editor's note: Matteo Giovannini is a finance professional at ICBC in Beijing and a member of the China Task Force at the Italian Ministry of Economic Development. The article reflects the author's opinions, and not necessarily the views of CGTN.

China's role in global financial markets is getting increasingly important. Having been included in major global indexes such as the Morgan Stanley Capital International (MSCI) and the Bloomberg Barclays and having currently the world's third-largest equity market and the world's second-largest bond market does not stop China from seeking more ambitious goals.

This is reflected in the launch on Tuesday of China's largest dollar bond sale in a move that has doubled last year's issuance and tripled that of 2017. It will satisfy global investors' demand for a higher-yielding dollar debt and increase diversification for Chinese corporations when they need to raise capital.

The issuance hits the market with a government bond offering that rose to six billion U.S. dollars with tenures of three years, five years, 10 years and 20 years, making it the biggest offering for China. The three-year, five-year, 10-year and 20-year issues have been priced 35, 40, 50 and 70 basis points above benchmark U.S.treasuries.

After roughly 15 years of no offshore bond activity, China has revived its international debt issuance program, returning to the dollar bond market in 2017 with an offer of two billion U.S. dollars.

Pedestrians walk past a branch of the Bank of China in Yichang, Hubei Province, June 25, 2015. /VCG Photo

Pedestrians walk past a branch of the Bank of China in Yichang, Hubei Province, June 25, 2015. /VCG Photo

According to the term sheet of the deal, China has given a mandate to a pool of 13 banks for a U.S. dollar bond issue. The Bank of China and Bank of Communications have been appointed as joint lead managers while China Construction Bank, China International Capital Corporation (CICC), Bank of America, Crédit Agricole, CTBC Bank, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Mizuho Securities and Standard Chartered have been appointed as joint book runners.

China's economy currently represents around 20 percent of global GDP with a market capitalization of its equity market at about six trillion U.S. dollars and a bond market capitalization of 12 trillion U.S. dollars, ranking as the world's second largest debt market. 

The Chinese dollar bond market is valued at around 740 billion U.S. dollars, according to Bloomberg data, and represents an important source of funding for local borrowers that can get an exposure to offshore bond markets.

Although China has the world's second-largest bond market, it still remains relatively underdeveloped where foreign investors own a tiny part of the Chinese bond market compared to a much more consistent foreign ownership across the developed markets such as Germany, France and the UK.

To give an example, the record sale that China has just reached isn't huge in relation to some other sovereigns such as Italy, which sold 7 billion U.S. dollars of dollar bonds last month, and Argentina which sold 9 billion U.S. dollars in January 2018.

These figures show clearly that China has untapped potential within its domestic market. The country is currently building its domestic institutional investor base where banks are the main bondholders. This represents a different landscape from overseas markets where pension funds, mutual funds and insurers are the major bondholders.

The U.S. dollar bond issue does not represent a stand-alone market operation. China sold its first euro-denominated bond in 15 years earlier in November, raising 4.4 billion U.S. dollars and making stakeholders predict that European markets will become a larger source of funds for China in the upcoming future.

The issuance of dollar-denominated and euro-denominated bonds have both a strategy at its core. The euro issuance's aim is helping to guide corporate issuance away from dollar-denominated debt, especially in a historical period when China and the United States are involved in a long-lasting trade war and where Europe is considered a more trustworthy partner.

The dollar issuance aims at accumulating dollar borrowings because once China replaces the dollar as a reserve currency with the Chinese yuan, it is going to be much cheaper to repay the dollar debt with U.S. currency that is not so strong and popular anymore. 

China, in this sense, is playing a long game that goes beyond any other country's prediction and that will make the Chinese financial market stronger, self-reliant, and in perspective with a truly globally accepted currency.

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