China squeezes spreads further

IFR Asia 1210 - 23 Oct 2021 - 29 Oct 2021
6 min read
Americas, Emerging Markets, Asia
Carol Chan

The People's Republic of China has once again repriced its US dollar sovereign credit curve with a US$4bn four-tranche bond deal that set its lowest-ever spreads over US Treasuries despite market volatility.

Demand persisted in the secondary market, where one tranche was bid inside US Treasuries. The new three-year tightened to Treasuries minus 5bp on Wednesday afternoon, according to Tradeweb.

The 144A/Reg S deal came as the world's second-largest economy hit its slowest pace of growth in a year, while the market watches the impact of the China Evergrande Group debt crisis.

"The People's Bank of China spoke the weekend before to calm frayed nerves with respect to the property market," said a bookrunner. "There was a lot of orchestration to create supportive conditions."

The order book showed that investors were not worried about China's growth story, and given the scarcity of highly rated Asian sovereign US dollar bonds the oversubscription rate was even higher than last year's issue.

Final orders for the deal reached US$23.2bn (including US$6.2bn from the lead managers), or 5.8 times the issue size, well ahead of last year's 4.5x coverage for a larger US$6bn offering, on robust demand from high quality global investors, including central banks and sovereign wealth funds.

"This transaction is a great testimony that China continues to be a favoured destination by global investors,” said Samuel Fischer, head of China onshore DCM at Deutsche Bank, pointing out that the record low issuance spread over US Treasuries reflected "strong market confidence".

"Offshore ownership of CGBs [Chinese government bonds] has gone up to 11% now, and we expect a further rise as China continues to weave its capital market more closely into the global network," he said.

Acting through the Ministry of Finance, China on Tuesday priced a US$1bn 0.75% three-year, a US$1.5bn 1.25% five-year, a US$1bn 1.75% 10-year and a US$500m 2.5% 30-year at 6bp, 12bp, 23bp and 53bp over Treasuries, respectively. The tranches were priced at 99.935, 99.879, 99 and 97.824, giving reoffer yields of 0.772%, 1.275%, 1.86% and 2.605%.

This represented tightening of 29bp–33bp from initial price guidance of Treasuries plus 35bp, 45bp, 55bp, and 85bp areas, respectively.

Tightest spreads

Coupons and reoffer yields were higher than last year's US$6bn four-tranche 144A/Reg S deal given the rise in US Treasury yields since then, but the reoffer spreads were the tightest the MoF has achieved.

Most of the tranches were priced inside China's existing curve, with the three-year and five-year coming flat to higher-rated Republic of Korea's dollar sovereign bonds, according to a banker from a Chinese bank.

South Korea is rated Aa2/AA/AA– while China's bonds have unsolicited ratings of A1/A+/A+ by the three major global rating agencies.

A lead from a European bank put fair value for the new transaction at Treasuries plus 10bp, 20bp, 20bp–25bp, 50bp–55bp, respectively, while research firm CreditSights put it at 10bp, 15bp, 20bp and 50bp, respectively, mainly referencing China's 0.4% 2023s, 0.55% 2025s, 1.2% 2030s and 2.25% 2050s, issued last October.

China's third-quarter GDP growth slowed to 4.9% year-on-year, hurt by power shortages, severe flooding and supply chain disruptions, while new home prices in 70 cities fell 0.08% in September from August, the first drop since April 2015.

Economists expect significant headwinds for China’s economy in the coming quarters due to the ongoing power shortage, waning impetus from exports and weak property investment, and urge the government to introduce more monetary and fiscal stimulus policies.

Trading tighter

Despite the overall tight pricing and weaker GDP growth, China's new sovereign dollar bonds traded 9bp–18bp inside reoffer on Wednesday morning, which traders said was probably a reflection of the smaller issue size this time and also strong demand for paper from high quality sovereigns, supranationals and agencies (SSA) in general.

This is the fifth consecutive year that China has tapped the offshore US dollar market to refresh its benchmarks, having ended a decade-long absence from market with a US$2bn offering in October 2017.

The 144A/Reg S format of the latest deal further reflected China's commitment to deepen and expand the connection with top quality global investors, said Christophe Cretot, Credit Agricole's head of debt origination and advisory for Asia Pacific. "As expected, SSA-type investors formed the backbone of the shorter-end tranches while the 10-year and 30-year tranches attracted active participation from the US onshore accounts," he said.

Bank of China, Bank of Communications, China Construction Bank, China International Capital Corp, ICBC, Bank of America, Citigroup, Credit Agricole, CTBC Bank, Deutsche Bank, Goldman Sachs, JP Morgan, Mizuho Securities and Standard Chartered were joint lead managers and joint bookrunners.

China in November last year also issued €4bn triple-tranche Reg S bonds comprising five, 10 and 15-year tranches.

A banker from a European bank said the MoF in its global investor call expressed its commitment to providing liquid benchmarks for Chinese issuers in both US dollar and euro markets, so there is a "high probability" that there may be a multi-billion euro deal later in the year.

Meanwhile, the MoF on Wednesday issued Rmb6bn (US$930m) of Dim Sum sovereign bonds in Hong Kong via a tender, which comprised the reopening of its existing 2.41% 2023s for Rmb4.5bn and 3.6% 2028s for Rmb1.5bn, bringing the total outstanding sizes to Rmb9.5bn and Rmb2bn, respectively.

The additional bonds were sold at 99.82 to yield 2.5056% for the 2.41% 2023s and at 105.10 to yield 2.7583% for the 3.6% 2028s.

The reopening received total subscriptions of Rmb13.29bn.