17 Nov 2017
Impact of the Resumption of Dollar-denominated Sovereign Bonds Issuance by the Mainland
Recently, the Mainland’s Ministry of Finance issued US$2 billion in sovereign bonds in Hong Kong, with US$1 billion each for 5-year and 10-year tenors. The bonds were open for subscription on October 26th. Investors showed strong appetite, with demand for the bonds climbing to 11 times the offering size, amounting to US$22 billion. The bonds were widely distributed among international investors. About 1/2 of the deal was sold to Asian institutions, 1/3 was allocated to European investors, and some were distributed to US investors.
In fact, the Mainland issued US dollar sovereign bonds for 12 times with totaling US$ 6.7 billion during 1993 to 2004, and this sale marked the first issuance of dollar-denominated sovereign bonds in 13 years. At present, liquidity remains abundant in global financial markets. The Fed is going to trim its balance sheet in a rather moderate pace, and the ECB will not undertake such kind of operation in the short term, though it will reduce monthly asset purchases from EUR60 billion to EUR30 billion starting January 2018. Facing relatively loose global liquidity, international capital has demand for bonds. The Mainland's sovereign bonds can satisfy investors’ needs for high-quality investment products with low risk while offering higher return than United States and Europe.
Considering the reaction of the market, the issuance of the US dollar sovereign bonds has following characteristics.
Firstly, active subscription shows international investors’ confidence in The Mainland’s sovereign credit and is conducive to RMB internationalization
The smooth promotion of RMB internationalization relies on international investors’ confidence in the Mainland’s sovereign credit and RMB assets. Earlier this year, two international credit rating agencies, Moody's and the S&P, downgraded the Mainland’s sovereign credit rating. The Mainland’s Ministry of Finance opined that the result ignored healthy fundamentals and huge development potential of the Mainland's economy because of the limitations and "pro-cyclical" nature in the assessment method of international credit rating agencies. This time, the Mainland didn’t seek any rating for the bonds it sold, and investors had to make their own adjustment. During the process, international investors could strengthen their understanding in the Mainland’s economy, which would pave the way for RMB internationalization. Actually, the 10-year bonds were priced to yield 2.687% , 43.7 bps higher than the yield of US Treasury bonds auctioned on August 10th and equivalent to the financing cost of Korea with AA sovereign rating. This reflects that the market has a different judgment on the Mainland’s sovereign credit risk from rating agencies and indicates investors' positive views for the Mainland's economic growth and financial stability.
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