China's economy is under increasing strain as growth slows, stocks fall and the currency depreciates amid a trade war with the United States. Photo: iStock

International investors piled into a rare global bond offering from China, boosting orders to over $22 billion, which allowed the issuer to price it at lower spreads than initially indicated on Thursday.

China, which last sold a global bond in 2004, priced a $1 billion, 5-year bond at 15 basis points over US Treasuries and a $1 billion, 10-year bond at 25 bps over. That compares with the initial guidance of 30-40 bps and 40-50 bps respectively. The bonds are unrated.

“Everyone wants to get their hands on this bond. These are tight levels but we are interested as there is little risk of repeated issuance in the same maturity bucket,” said Edmund Goh, fund manager at Aberdeen Standard Investments.

The sovereign debt sale is expected to serve as a pricing benchmark for China’s state-owned firms which are among Asia’s most active issuers in the offshore bond market.

“Sovereign bonds set the benchmark and create velocity for capital markets to deepen,” said Henrik Raber, Standard Chartered debt capital market head. “We expect to see continued robust primary bond issuance activity across Asia, and in particular, from China.”

Existing bonds from these issuers have seen spreads narrow in anticipation of tight pricing of the underlying sovereign.

Export Import Bank of China’s bonds have rallied 10 bps since the sovereign debt plan was announced earlier this month.

“It will re-price the China (state-owned enterprise) curve across the board particularly higher-rated bonds like CNOOC, Sinopec, Petrochina,” said Raymond Lee of Kapstream Capital adding that he would prefer investing via credit default swaps – insurance-like contracts that protect against defaults.

“I would prefer to go long the CDS if I want exposure to a China sovereign, which is providing an extra around 20 bps of carry and also considered liquid. In recent times it’s uncommon for the CDS to trade tighter than the bond, and it tells us that the technical bid is very strong for the new deal.”

This demand for China’s CDS has pushed it to levels below higher-rated sovereigns such as South Korea.

Investors say that infrequent, high profile issuers such as China can get away with pricing the bonds tightly even though the bonds are unrated.

Last month, S&P cut China’s long-term sovereign credit ratings by one notch to A+ from AA-, after a downgrade from Moody’s in May. The move put S&P’s ratings in line with those of Fitch and Moody’s.


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