China woos overseas bond buyers

Credit: REUTERS/Petar Kudjundzic

China is expanding its footprint in the international bond markets as it looks to enhance its profile at a time when global attention is focused on trade tensions with the US.

By Carol Chan and Yanfei Wang

HONG KONG, July 5 (IFR) - China is expanding its footprint in the international bond markets as it looks to enhance its profile at a time when global attention is focused on trade tensions with the US.

Last week, acting through the Ministry of Finance, the government sold renminbi-denominated bonds in Masau for the first time, furthering the internationalisation of the Chinese currency and the development of the CNH market.

This week and next, MoF officials will meet fixed-income investors in Europe ahead of a potential foreign currency-denominated bond offering later this year, which would follow two US dollar bond issues in the past two years.

The MoF’s core team in charge of international funding will visit Frankfurt on July 12 and London on July 15, according to people familiar with the situation. The official purpose of the meetings is to update investors on China's economic and financial situation.

Bank of China, Bank of Communications and Deutsche Bank are arranging the Frankfurt meetings, while BOC, BoCom, HSBC and Standard Chartered Bank are setting up the London leg.

China ended a decade-long absence from the US dollar bond market in October 2017, when it printed US$2bn of sovereign bonds to overwhelming demand. It returned in October last year for a further US$3bn, again attracting strong demand despite a global market sell-off during bookbuilding.

Ahead of these two deals, MoF officials only held roadshows in Hong Kong, confident that demand would far outweigh supply.

The MoF has not announced any plans for foreign currency-denominated bonds so far this year, but the investor meetings are being watched with interest and the choice of two European cities has led some to speculate that China may be considering a new currency denomination.

"The MoF probably will continue to issue foreign currency-denominated bonds to international investors. To hold a roadshow in Europe doesn't mean that the MoF is looking to issue euro bonds. I think for currency, it is flexible," one person said.


Last Thursday, the MoF broke new ground closer to home when it sold an offshore renminbi-denominated bond in the special administrative region of Macau. The Rmb1.7bn (US$247m) three-year notes priced at 3.05%, inside initial guidance of 3.20%.

The Reg S unrated issue will be cleared through Chongwa (Macao) Financial Asset Exchange and Macau will grant it tax exemption.

An additional Rmb300m 3.30% two-year retail tranche is open to local investors until July 19.

The offering comes ahead of the 20th anniversary of Macau's return to China in December 1999 and is intended to demonstrate Beijing's support for the development of the territory's financial market and the diversification of its economy.

Becky Liu, China macro strategist at StanChart, said in a note on June 25 that the deal could mark the beginning of regular CNH bond issuance by the Chinese government in Macau, although the size and frequency will likely be much smaller than Beijing's sales of Dim Sum bonds in Hong Kong.

The Macau CNH bonds have been dubbed "Lotus bonds" to distinguish them from Dim Sum bonds.

"We felt the MoF is increasing its presence in the offshore market this year. Apart from Macau, it might also tap the European market as Europe has been involved a lot in Belt and Road Initiative projects," said a banker on the MOF's Macau offering.

The expanded supply could help support the development of the CNH by establishing a funding benchmark and increasing the availability of risk-free investible assets offshore, said Liu.

In its previous CNH bond issues to institutional investors in Hong Kong, the MoF has used the bond tendering platform of the Hong Kong Monetary Authority’s Central Moneymarkets Unit. In Macau, it conducted a bookbuilding exercise as there is no equivalent to the CMU infrastructure.


There is no specific timeline for CNH bond issuance, according to a MoF official, who said only that China is willing to strengthen financial cooperation with parties involved in BRI projects.

China has increased its renminbi bond issuance offshore. In addition to the MoF's plan for annual CNH government bond issuance in Hong Kong starting in November last year, the People's Bank of China has regularly issued CNH bills in Hong Kong through the CMU.

In the first half of this year, the PBoC sold Rmb70bn of CNH bills in Hong Kong, boosting overall CNH issuance, including bonds and certificates of deposit, to Rmb166bn, a 42% year-on-year increase, according to an HSBC report.

BOC Macau branch was the sole global coordinator on both the institutional and retail tranches of the MoF's offering in Macau. It was also joint lead manager and joint bookrunner with BoCom Macau branch, Banco Nacional Ultramarino, China Construction Bank Macau branch, ICBC (Macau), HSBC Macau branch, Luso International Bank, Agricultural Bank of China Macao branch, China Guangfa Bank Macau branch, StanChart HK, Tai Fung Bank, Macau Chinese Bank and Well Link Bank on the institutional tranche.

For the institutional portion, 67% of the bonds went to Macau, 28.5% to Hong Kong, and 4.5% to others. By investor type, 85% went to banks, 9% to pension funds, 4% to central banks, 1% to asset managers and fund managers, and 1% to insurers and others.

BOC Macau branch, BoCom Macau branch and BNU are joint lead managers and joint bookrunners on the retail tranche.

(This story will appear in the July 6 issue of IFR Asia magazine Reporting by Carol Chan and Yanfei Wang; Editing by David Holland)

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