China plans to sell $2 billion in US dollar denominated bonds later this month, its first US dollar issue in almost 13 years. The country has about $200 million US dollar denominated debt outstanding with bonds maturing in 2027 and 2096 yielding 3.1% and 4.1% respectively.
Given the relatively small size of the issue as compared to China’s massive forex reserve of $3 trillion, the purpose of this issue seems more to serve as a reference for Chinese borrowers than to raise funds. Without an official sovereign reference rate as a benchmark, most Chinese borrowers have issued in the US dollar bond markets at yields thought to be too high. The pricing of this issue will be keenly watched as it could bring down borrowing costs for Chinese issuers – primarily state-owned enterprises and investment grade issuers.
This issue comes at a time when Asian G3 bond issuances are at record highs, largely led by China, estimated to account for 60-70% of Asian new issuances. Issuances in July and August have doubled from $20 billion in 2015 to $40 billion this year. Thus, the China sovereign bond issue will help in repricing these bonds and pricing future G3 bond issuances from the region.
China’s targeted pricing is expected to be 60-70 bps over US Treasuries, according to analysts. For perspective, South Korea’s 5-year US dollar debt traded at an average spread of 67 bps over Treasuries last quarter, according to an article by the Straits Times. South Korea has a credit rating from Moody’s of Aa2, two notches higher than China’s rating of A1, which was downgraded a notch earlier this year.