China’s Dollar Bond Plan Sets Aside U.S. Decoupling Worries

(Bloomberg) -- Well into the second year of the trade war with the U.S., China is pressing ahead with its campaign to deepen an offshore bond market denominated in the currency of its top strategic competitor.

For the third straight autumn, China is selling dollar bonds, with a potential $6 billion total offering of three-year, five-year, 10-year and 20-year securities, according to people familiar with the plans. The Ministry of Finance said in its 2017 resumption of dollar-debt sales it would help build a benchmark yield curve for Chinese issuers, which range from developers to local authorities.

“The sovereign deal reiterates that the China dollar-bond market is a key part of policy, with issuers encouraged to fund in dollar bonds and onshore investors to buy them,” said Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group Ltd.

China’s business-as-usual approach contrasts with rising concern about a decoupling between the world’s two largest economies. At the Bloomberg New Economy Forum last week in Beijing, Henry Kissinger described the duo being in the “foothills of a cold war,” and ex-U.S. Treasury Secretary Henry Paulson said he was disheartened that his 2018 warning about an iron curtain descending was coming true.

Dollar bonds sold outside the U.S. have been a feature of the global financial system since the 1960s, and are a crucial financing tool for companies doing business across borders. So in one sense it’s natural for China to want to make it easier and cheaper for its firms to issue offshore.

The bulk of Chinese dollar bonds is typically taken up by Chinese buyers -- they’re a convenient place for banks to invest their foreign-currency deposits. That means borrowers needn’t worry about the kind of foreign-investor exodus that has plagued some emerging markets over the decades. And most of them, including this week’s sovereign issue, are being listed under Regulation S, which means they aren’t sold in the U.S.

Even so, because the U.S. retains ultimate access to liquidity in dollars and can blacklist overseas companies, issuing securities in the American currency could theoretically leave Chinese borrowers vulnerable. And deepening tensions with China did see discussions in Washington earlier this year about ways to potentially curtail American investment flows to China.

‘Nuclear’ Option

Most see such talk as just talk. For his part, Paulson said last Thursday that “decoupling China from U.S. markets by de-listing Chinese firms from U.S. exchanges is a terrible idea.”

“Realistically, I don’t think it’s possible to have a material decoupling anytime soon” between the Chinese and U.S. financial systems, said Becky Liu, head of China macro strategy at Standard Chartered Plc in Hong Kong. “It’s way too nuclear an option, even from the U.S. perspective -- it would damage the U.S. financial system.”

That doesn’t necessarily mean American investors will be snapping up China’s sovereign issue. The order book for last year’s sale showed diminished interest from U.S.-based investors.

China was out of the sovereign foreign-currency debt issuance business for more than a decade before its $2 billion offering of dollar bonds in 2017. Earlier this month, China also sold euro debt for the first time since 2004. The government issued bonds in Japanese yen in the 1990s to 2000, but they’ve all now matured, according to data compiled by Bloomberg.

Century Bond

With the latest sale, China will have dollar securities outstanding with maturity dates ranging from 2022 to 2096 (the result of a small century bond sold in the 1990s). There will be an increasing variety of maturities off which Chinese corporate debt can price, with sovereign benchmarks at maturities from 2022 to 2048 of at least half a billion dollars each.

China’s Ministry of Finance announced price guidance for its dollar bond offering on Tuesday. The guidance on the three, five, 10 and 20-year notes was at 60, 65, 70 and 80 basis points areas over U.S. Treasuries respectively, according to people familiar with this offering.

The total Chinese dollar bond market now tops $740 billion, according to data compiled by Bloomberg, and issuance so far this year has run at a record pace. On a single day in early November, some six property developers were selling dollar securities.

While China has the world’s second-largest bond market, in some ways it remains relatively underdeveloped, according to Liu. The country is still building out a domestic institutional investor base such as the pension funds and insurers that are a major feature overseas. Banks are the main holders of bonds onshore.

“At this stage no one can really avoid the dollar market,” Liu said.

To contact the reporters on this story: Christopher Anstey in Tokyo at canstey@bloomberg.net;Annie Lee in Hong Kong at olee42@bloomberg.net;Ina Zhou in Hong Kong at hzhou179@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Chan Tien Hin

©2019 Bloomberg L.P.