China borrows almost as cheaply as the US in the dollar bond market

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China borrowed almost as cheaply as the United States after returning to the global dollar bond market for the first time in three years.

Investors placed nearly $40 billion in orders Thursday to buy $2 billion in bonds issued by China's Finance Ministry at yields only slightly higher than the equivalent U.S. Treasury.

The sale took place in Saudi Arabia, breaking with the tradition of issuing bonds in Hong Kong, a sign of Beijing's desire to strengthen its financial ties with the oil-rich kingdom. Chinese, American and global banks organized the sale.

The illustration of deliverance[es] market-oriented investors' confidence in China's sovereign credit, said Zhang Xing, head of fixed income in the investment banking department of China International Capital Corp, one of the book-running banks.

Zhang added that bidders for the issue included 400 international investors, including central banks, sovereign wealth funds, insurance companies, asset managers, funds and banks.

The three-year, $1.25 billion debt was sold at a rate of 4.274 percent, just 0.01 percentage points higher than its Treasury equivalents. Yields on the $750 million five-year bond were 0.03 points higher than those on Treasury bills. These are the tightest spreads for a Chinese sovereign dollar issue in the past 30 years, according to Bloomberg data.

Debt yields fell further, to about 0.25 percentage points below U.S. borrowing costs, as the new bonds began trading on Thursday.

Such negative spreads could be due to particularly strong demand for high-quality U.S. dollar credits, but limited supply from higher-quality Chinese issuers, said Xiaojia Zhi, head of Asia research at Crédit Agricole , another bookkeeper.

Older Chinese U.S. dollar bonds have already traded below U.S. Treasuries this year, in part because of demand from Chinese investors looking to park the dollars they hold overseas. Chinese investors benefit from tax-free interest payments on the country's government bonds.

There is a huge demand imbalance [for investment grade sovereign dollar bonds]said Ju Wang, head of FX and rates for Greater China at BNP Paribas, who said that historically, much of the demand for Chinese sovereign dollar bonds has come from domestic investors.

Given the interest rate gap between the United States and China, reflected by falling yields in China's domestic bond market, Chinese companies are choosing to keep their money in dollars, Wang added.

A yield roughly in line with that of Treasuries, which are considered the international risk-free rate, could also help other issuers of Chinese dollar bonds that rely on the country's sovereigns as a benchmark.

At nearly 20 times the amount on offer, demand for Chinese bonds was well above typical sales of U.S. dollar debt from emerging markets, reflecting the relative scarcity of international issuance from Beijing, a blue-chip issuer.

South Africa, for example, was oversubscribed 2.5 times in a $3.5 billion sale this week.

However, some analysts warned that $2 billion did not represent a major bond issue for the world's second-largest economy.

It is a token issuance, as the majority of dollar issuance takes place in Hong Kong, said Peiqian Liu, Asia economist on the global macroeconomics and strategic asset allocation team at Fidelity, which said the deal sends more of a signal about expanding the scope of financial activities. cooperation on a global scale.

Beijing does not raise much dollar-denominated sovereign debt and its trillions of dollars in foreign exchange reserves and deep domestic bond market mean it does not account for much of its public financing.

However, international bond issues are an important way of providing access to global investors to buy the country's sovereign debt, as well as setting a benchmark for other issuers.

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