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Rare China soverign bond sees robust global demand, tight pricing

[HONG KONG] International investors piled into a rare global bond offering from China on Thursday, with orders more than 10 times the US$2 billion on offer, allowing Beijing to price it at much lower spreads than initially indicated.

The sovereign debt sale is expected to serve as a pricing benchmark for China's state-owned firms which are among Asia's most active issuers in the offshore bond market.

China, which last sold a global bond in 2004, priced a US$1 billion, five-year bond at 15 basis points (bps) over US Treasuries and a US$1 billion, 10-year tranche at 25 bps over.

That compares with the initial guidance of 30-40 bps and 40-50 bps respectively. The bonds are unrated.

The total issue attracted US$21 billion in orders, with investors unfazed by two downgrades of the sovereign this year by S&P and Moody's.

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The 2.125 per cent bonds due 2022 were trading at 100/100.15 cents on the dollar on Friday after pricing at 99.666. The 2.625 per cent bonds due 2027 were quoted at 101.25/101.295 after pricing at 99.459.

"Everyone wants to get their hands on this bond. These are tight levels but we are interested as there is little risk of repeated issuance in the same maturity bucket," said Edmund Goh, fund manager at Aberdeen Standard Investments.

The unsatiated demand spilled over into the credit default swaps market - another route that investors can use to get credit exposure. The five-year CDS for China dropped on Friday to 45.5 bps from 49 bps.

The bonds had similar allocation patterns in geographic terms and by investor type.

The 2022 bond saw 52 per cent participation from Asia, 28 per cent from Europe and 20 per cent from the United States.

By investor type ,fund managers accounted for 51 per cent, banks 34 per cent, public sector investors 11 per cent and others 4 per cent.

The 2027 bonds saw a 47 per cent take up from Asia, 34 per cent from Europe and 19 per cent from US investors.

By investor type, fund managers accounted for 66 per cent, banks 12 per cent, public sector investors 16 per cent and others 6 per cent.

"Sovereign bonds set the benchmark and create velocity for capital markets to deepen," said Henrik Raber, Standard Chartered debt capital market head. We expect to see continued robust primary bond issuance activity across Asia, and in particular, from China."

Existing bonds from these issuers have seen spreads narrow in anticipation of tight pricing of the underlying sovereign.

Bank of China's bonds have rallied 10 bps since the sovereign debt plan was announced earlier this month.

"It will re-price the China (state-owned enterprise) curve across the board particularly higher-rated bonds like CNOOC, Sinopec, Petrochina," said Raymond Lee of Kapstream Capital adding that he would prefer investing via credit default swaps - insurance-like contracts that protect against defaults.

"I would prefer to go long the CDS if I want exposure to a China sovereign, which is providing an extra around 20 bps of carry and also considered liquid. In recent times it's uncommon for the CDS to trade tighter than the bond, and it tells us that the technical bid is very strong for the new deal."

This demand for China's CDS has pushed it to levels below higher-rated sovereigns such as South Korea.

Investors say that infrequent, high profile issuers such as China can get away with pricing the bonds tightly even though the bonds are unrated.

Last month, S&P cut China's long-term sovereign credit ratings by one notch to A+ from AA-, after a downgrade from Moody's in May. The move put S&P's ratings in line with those of Fitch and Moody's.

Both S&P and Moody's cited risks from a rapid build-up in debt.

China's finance ministry has described the S&P downgrade as"a wrong decision" that ignored the economic fundamentals and development potential of the world's second-largest economy.

President Xi Jinping said at the Communist Party Congress last week that China will deepen economic and financial reforms and further open its markets to foreign investors as it looks to move from high-speed to high-quality growth.

Bank of China, Bank of Communications, Agricultural Bank of China, China Construction Bank, CICC, Citigroup, Deutsche Bank, HSBC, ICBC and Standard Chartered Bank have been hired to manage the deal.


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