U.S. one-hundred dollar bills and Chinese one-hundred yuan banknotes are arranged for a photograph in Hong Kong, China. (Photographer: Xaume Olleros/Bloomberg)

Xi's Market Clout on Display in Rare China Dollar Bond Sale

(Bloomberg) -- China sold its first sovereign dollar bonds since 2004 following a week when Chinese leaders in Beijing outlined a greater role for the nation on the world stage.

The Ministry of Finance priced the bonds 15 basis points over Treasuries for its $1 billion of five-year notes, from an initial guidance of 30-40 basis points announced earlier on Thursday. The 10-year notes were priced at 25 basis points, from the initial guidance of 40-50 basis points, according to people familiar with the offering, who aren’t authorized to speak publicly.

The sale comes on the heels of the twice-a-decade Communist Party congress where President Xi Jinping cemented his status as China’s strongest leader in decades. Xi has a three-decade vision of turning China into a leading global power, with a plan to deepen China’s economic ties with Asia, Europe, and Africa through a global infrastructure initiative.

The issuance will help establish a benchmark for pricing foreign currency bonds from China, the Ministry of Finance said in a statement on Tuesday.

“Coming straight after the 19th Party Congress, the timing of issuance was spot on,” said Luke Spajic, head of portfolio management for emerging Asia at Pacific Investment Management Co., which manages $1.7 trillion. “Though the deal size is relatively modest, the symbolic nature of this issuance will give state-owned enterprises, and banks, a marker for valuation.”

China is offering the bonds unrated, in a break with traditional practice by sovereigns in the region when they sell dollar notes. S&P Global Ratings last month followed Moody’s Investors Service in cutting China’s sovereign rating, citing soaring debt and increased economic and financial risks.

See also: Gadfly column on China bond sale

The debt sale was one of the most eagerly anticipated in Asia this year and coincides with record dollar-bond issuance of $144 billion by Chinese companies so far in 2017. The sovereign itself has been a rare issuer in foreign currencies and has only ever sold the equivalent of about $11 billion of such notes, according to data compiled by Bloomberg.

BNP Paribas SA said this week the five-year and 10-year bonds may price at 30 basis points and 40 basis points respectively over Treasuries. The 10-year note priced at a spread lower than South Korea’s bond of the same tenor. South Korea, rated two levels higher than China, sold a 10-year bond at a spread of 55 basis points in January, and it was about 74 basis points on Thursday.

S&P cut the nation’s rating one level to A+ on Sept. 21, joining Moody’s in downgrading the nation to a single A credit. The bond sale has already helped push down spreads on state-owned Chinese company notes on expectations that the sovereign would price tight.

“We have taken some positions in the quasi-sovereign area, and would certainly consider participating in the new USD bonds offering partly because it’s a rare and small deal,” Clifford Lau, Singapore-based head of fixed income for Asia Pacific at Columbia Threadneedle Investments, had said. “A lot of expectations and enthusiasm are built into this offering.”

©2017 Bloomberg L.P.

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