In its first euro-denominated sovereign bond sale in 15 years, China has issued 4 billion euros ($4.4 billion) of bonds, as the country moves to diversify away from dollar funding amid the trade war.
The Ministry of Finance announced (link in Chinese) that it issued in France on Monday 2 billion euros of seven-year debt, 1 billion euros of 12-year, and another 1 billion euros of 20-year bonds.
China last issued such bonds in 2004, and this marks the country’s largest single foreign-currency denominated bond sale to date, according to the ministry. The move shows the country values European financial markets, it said.
Demand was strong for the bonds, with the ministry saying that issuance had beat expectations by receiving more than 20 billion euros worth of bids, of which 57% came from Europe.
Over the past more than two decades, China has primarily sold sovereign bonds in U.S. dollars to tap the most liquid bond market in the world. In 1993, the central government issued its first dollar-denominated bonds, and to date it has issued $119.2 billion in dollar bonds.
By comparison, China has issued a combined $32.5 billion of euro-denominated sovereign bonds since it first started selling them in May 2001 [ie in just the 3 years from 2001 to 2004], and a total of $4.3 billion worth of yen sovereign bonds since its initial such issuance in 1993.
China’s Blockbuster Euro Bond Sale Just Opened the Floodgates
The success of China’s first euro bond offering in 15 years is likely to spur a rush of issuance from the nation’s companies.
The Ministry of Finance’s sale of 4 billion euros ($4.4 billion) of notes due in seven, 12 and 20 years drew investor orders worth almost five times that amount, according to people with knowledge of the sale. The shortest of the three bonds, which was most in demand, tightened in early secondary market trading, based on Bloomberg BVAL data, while spreads on the other two widened slightly.
China relied on dollar bonds for earlier issues, selling $3 billion of debt last year and $2 billion in 2017. While the nation also plans to sell dollar bonds at the end of the month, the ongoing trade war is prompting Chinese firms to seek alternative funding sources.
“It is natural for the China sovereign and Chinese issuers to diversify their funding sources,” says Paul Lukaszewski, head of corporate debt for Asia and Australia at Aberdeen Standard Investments. “Having seen the U.S. take punitive steps against Chinese debt issuers like Huawei within the context of the broader trade dispute, it is easy to understand why China may have elevated the strategic importance of looking toward the euro debt markets.”
Cheap funding costs are also a draw. Average yields on investment-grade euro bonds are below 0.5%, close to a record low level of 0.23% reached in late August, according to a Bloomberg Barclays Index.
Investors see this latest offering as part of China’s strategic efforts to improve trade relations with Europe. A campaign for European countries to cooperate with China’s Belt and Road Initiative has sparked concern over the country’s influence.
This deal is “an important step for China’s Belt and Road Initiative which includes an aim for better connection between Europe and China,” says Ken Hu, chief investment officer for Asia Pacific fixed income at Invesco Hong Kong Ltd.
Major Issue of Sovereign Euro Bonds a Hit in Paris
China’s first issuance of 4 billion euros ($4.4 billion) in sovereign bonds in France, the nation’s largest foreign-currency-denominated bond offering ever, will encourage investment of more funds from Europe in Chinese government and corporate sectors, market participants said.
The issuance, China’s first euro-denominated sovereign bond offering in 15 years, was completed on Tuesday. Global investors offered five times the issuance amount, for a subscription of nearly 20 billion euros of the bonds, and 57 percent of the investment came from Europe.
“The result was better than expected,” said a statement the Ministry of Finance released on Wednesday.
The successful bond issuance was announced during a talk between President Xi Jinping and his French counterpart, Emmanuel Macron, in Beijing.
Xi said the bond issuance is an important step to deepen financial cooperation between China and France, as well as between China and the European Union.
It is also a significant move to support Paris in its efforts to build itself into an international financial center.
The bond issuance sends a message of China’s continual opening-up to foreign investors, analysts said. It is significant to further integrate China into the global financial market, especially leading the way for more Chinese issuers to access European markets and connecting the capital markets of Europe and China — two of the world’s leading economies, according to analysts.
Reopening the euro financing channel is conducive to enriching and improving the yield curve of China’s overseas sovereign bonds and to provide a benchmark for Chinese bond issuers who need financing in euros, according to the Finance Ministry’s statement.
This year marks the 55th anniversary of the establishment of diplomatic relations between China and France. The issuance of China’s sovereign bonds in Paris reflects the importance of the European financial market, and it will help to strengthen the economic and financial cooperation between the two countries, it said.
The bonds sold in France will help provide alternative funding sources for the Chinese government, as well as for companies seeking funds in the European capital market, experts said. Before this issuance, the Finance Ministry sold dollar bonds for two consecutive years — $3 billion last year and $2 billion in 2017.
Deutsche Bank, Germany’s largest lender, is among the foreign banks that supported the euro deal. “The transaction is truly a milestone, setting a benchmark for Chinese issuers in the euro market,” said Samuel Fischer, head of onshore debt capital markets at Deutsche Bank in Beijing.
“The euro market offers very low interest rates and an unrivaled institutional investor base for long-dated transactions,” or those of longer maturity, he said. “We have seen increasing interest by Chinese corporations to tap the euro markets, given their growing presence in Europe.”
Kim Eng Tan, senior director at S&P Global Ratings, said, “China issues this bond at a relatively favorable time. Interest rates have remained stable at levels attractive to many borrowers.” S&P Global had assigned the A+ rating to China’s proposed euro-denominated bonds, which reflected the global rating agency’s long-term issuer credit rating on the sovereign, according to Tan.
“The issuer credit ratings on China reflect our view of the government’s reform agenda, growth prospects and strong external metrics,” he said.
According to the Finance Ministry, the 4 billion euros in sovereign bonds have three different maturities: 2 billion euros of seven-year notes with a yield of 0.197 percent, 1 billion euros of 12-year notes having a 0.618 percent yield and 1 billion euros of 20-year notes with a 1.078 percent yield.
Cheap funding costs currently help to attract investors, analysts said. According to a Bloomberg Barclays Index, a benchmark index of the global bond market, the average yields on investment-grade euro bonds were below 0.5 percent on Wednesday, close to a record-low level of 0.23 percent in late August.
The bonds will be listed later on the Pan-European Stock Exchange as well as on the London Stock Exchange, the Finance Ministry said.
Source: China Daily