Credit: China holds fast to its USD bond market

China's USD bond offering affirms policy continuity in the offshore USD bond market, even with US-China trade tensions, the ascendancy of the onshore RMB bond market, and concerns over USD funding.
Chang Wei Liang26 Nov 2019
  • China's MOF will soon offer USD bonds, following previous offerings in 2018 and 2017
  • This offering affirms the importance of the Chinese USD bond market...
  • ... even given trade tensions, the ascendancy of the onshore bond market, and USD funding concerns
  • Continued deepening of the USD bond market with a sovereign benchmark will help Chinese USD credit
Photo credit: AFP Photo

China’s MOF readies record USD bond offering

China’s Ministry of Finance (MOF) has announced that it will offer USD6bn of bonds, with four tenors being marketed. This marks the third annual consecutive offering of USD bonds since 2017. The move underscores the fact that China is still holding fast to its strategy of deepening the international USD bond market for Chinese credit.

2019 tensions for the USD bond market

Prospects for the Chinese USD bond market have been less sure amidst various developments in 2019. Chief among them was the sharp escalation in US-China tensions, which has raised questions over whether policy could move away from fostering closer financial links between the two economies.

In addition, the onshore RMB bond market is closing the gap with the offshore USD market, lessening its importance as an avenue to tap foreign financing. China has consistently introduced reforms to facilitate foreign investor access to its $13trn onshore RMB market (see table on next page), which culminated in the inclusion of onshore Chinese bonds in a major international bond index this year.

New regulations were rolled out in June 2019, limiting LGFVs (local government financing vehicles) and real estate developers to using offshore bond proceeds for refinancing only. While these are macro-prudential in nature, they could indicate rising concerns of USD funding risks, which may presage additional restrictions. When MOF announced in October that it will issue EUR-denominated bonds for the first time in 15 years, it begs the question of whether there is an intent to limit USD liabilities, or encourage firms to reduce USD funding risks.

Affirming continuity in the USD bond market

MOF’s USD bond offering this week can be viewed as affirming a continuation of Chinese policy to develop and deepen the offshore Chinese USD bond market.

Issuance is guided to be up to USD6bn, which will be higher than the USD2bn and USD3bn offerings seen in 2017 and 2018 respectively. Furthermore, there will be two debut tenors (3y and 20y) on top of the usual 5y and 10y tenors, which will be helpful in forming a sovereign USD curve for Chinese credit issuance.

We view the 3y tenor to be particularly important. It will serve as a valuable yardstick for Chinese credit pricing, given that a large proportion of Chinese long-term corporate bonds are marketed at the 3y tenor.

Wider pricing does not reflect value

While the indicative pricing is wider compared to the earlier offerings, this is in line with the widening seen in current MOF USD bonds trading in the market. Trade uncertainty and a slowdown in Chinese growth have certainly induced a slight increase in the risk premium. That said, this is a case where the (signalling) value of the USD bonds on offer far outweighs the price.

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Chang Wei Liang

Credit & FX Strategist

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