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China sells first sovereign bond at negative interest rate, taking advantage of record low borrowing costs to raise capital

Chad Bray
·5 min read

China has sold the nation’s first negative-yielding sovereign bond, the latest to take advantage of the record low cost of money amid the global coronavirus pandemic to finance its borrowing.

The Ministry of Finance sold about 750 million worth of a five-year note bearing an interest rate of -0.15 per cent overnight on Wednesday, the smallest tranche of a 4 billion (US$4.74 billion) sale of euro-denominated debt.

The order book attracted 18 billion in bids, or 4.5 times the entire offer. The government sold 2 billion of a 10-year tranche, and 1.25 billion in the 15-year tranche, according to a term sheet seen by South China Morning Post.

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“Similar to last year, both the 10- and 15-year tranches attracted a very strong order book from global investors, offering a positive yield for China sovereign risk which remains a very compelling story,” said Sam Fischer, head of China onshore debt capital markets at Deutsche Bank.

The international bond sale – China’s sixth offer in four years and the second euro-denominated issue in two years – was led by three state-owned lenders and nine foreign banks, including BofA Securities, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase and Standard Chartered. Including this week’s sale, the Chinese government has raised US$27 billion and 8 billion since its return to the global bond market in November 2017.

China’s economy, which expanded by 4.9 per cent in the third quarter, is the only major economy that is growing, as the world continues to grapple with a coronavirus pandemic that has sickened 55.88 million people and claimed 1.3 million lives. As the first major economy to restore production and most of the nation’s services, China’s economy is expected to expand 2 per cent in 2020 and grow 7.5 per cent next year due to an increase in domestic consumption, according to Goldman Sachs’ forecast.

The International Monetary Fund puts China’s 2021 economic growth pace at a faster 8.2 per cent – the second highest after India. Investors also have increasingly turned to Chinese debt in search of yield as the pandemic has extended a period of historically low interest rates globally and Beijing has moved to further open its US$16 trillion onshore debt markets to foreign investments.

In September, FTSE Russell said it would start adding Chinese sovereign debt into its World Government Bond Index from October 2021, becoming the last of the major bond index providers to include Chinese government bonds in their indices beginning last year.

The inclusion by FTSE Russell is expected to lead to a further influx of as much as US$150 billion of foreign money into Chinese debt, following moves by Bloomberg Barclays and JPMorgan to include Chinese government bonds in their indices.

Foreign investors held about 3 trillion yuan (US$457 billion) of Chinese bonds at the end of October, with the Chinese debt market expanding by 40 per cent annually over the past three years.

Investors who took part in the Ministry of Finance’s offering included central banks, sovereign wealth funds and asset managers from Europe, Asia and the US, according to David Yim, head of capital markets for Greater China and North Asia at Standard Chartered. European investors accounted for 85 per cent of the 15-year tranche, he said.

“This once again demonstrates that the international investors are full of confidence in China’s strong economic rebound and its future developments despite the lingering global Covid-19 pandemic,” Yim said.

Global debt is on track to exceed US$277 trillion in 2020, spurred by a US$15 trillion surge in government and corporate borrowings in the first nine months, as the pandemic continues to weigh on growth, according to a new report by the Institute of International Finance. Emerging market debt accounted for 248 per cent of GDP in the third quarter.

“The pace of global debt accumulation has been unprecedented since 2016, increasing by over US$52 trillion,” said the Institute of International Finance’s director of sustainability research Emre Tiftik and associate economist Khadija Mahmood. “As a result, there is significant uncertainty about how the global economy can deleverage without significant adverse implications for economic activity. The next decade could bring a reflationary fiscal response, in sharp contrast to the austerity bias in the 2010s.”

China’s latest bond sale also marked the return of HSBC to Chinese government debt sales after it was left off of a dollar-denominated sale last month for the first time since China resumed issuing international debt. Executives have privately attributed HSBC’s exclusion in October to rotation by the Chinese government between international banks.

With its business bridging between the East and the West, HSBC has faced a difficult task navigating worsening US-China relations.

It has been criticised in the West over its public support of a controversial national security law Beijing adopted for Hong Kong this summer and in the mainland over help it provided US prosecutors in an investigation into Chinese telecommunications company Huawei Technologies.

The bank has maintained it has a “good ongoing working relationship” with the Ministry of Finance and is a “leading foreign bank” for the issuance of G3 debt in mainland China.

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