China’s Blockbuster Euro Bond Sale Just Opened Floodgates

(Bloomberg) -- 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.

--With assistance from Kari Lindberg and Hannah Benjamin.

To contact the reporters on this story: Rebecca Choong Wilkins in Hong Kong at rchoongwilki@bloomberg.net;Annie Lee in Hong Kong at olee42@bloomberg.net

To contact the editors responsible for this story: Neha D'silva at ndsilva1@bloomberg.net, Richard Frost, V. Ramakrishnan

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