The Chinese mainland will soon issue $2 billion in US dollar-denominated sovereign bonds in Hong Kong, the Ministry of Finance announced on Oct 11, a move to encourage foreign exchange to flow into the onshore market amid a further opening of the financial sector.
The issuance will consist of $1 billion five-year bonds and $1 billion with 10-year maturity, the ministry said. The bonds will be traded on Hong Kong Exchanges and Clearing Ltd, while the issue date will be disclosed later.
Some financial institutions expect that the offering may take place by the end of this month, and the issuing price will be finally determined by international investors’ subscriptions and its rating degree.
George Wu, chief economist with Huarong Securities, said that “it is a wise time to launch the bond when the US dollar is weakened by a relatively lower interest rate, which means a cheaper issue cost”.
As $2 billion is not a huge amount, it is more like a signal that the government expects to channel more capital inflows to support a strong Chinese currency and to maintain a stable foreign exchange reserve, according to Wu.
“The debt may be used for State-owned companies or government projects to facilitate overseas investment, especially to support the Belt and Road Initiative,” he said.
The renminbi daily trading reference was 6.5841 per dollar on Oct 11, up 0.65 percent from Oct 10, the largest daily rise in more than a month.
Along with the strengthened currency, the country has seen eased capital outflows in recent months, while its foreign exchange reserves rose to the year’s highest level to reach $3.11 trillion in September, with growth for eight consecutive months.
The bond issuance also indicated the government’s confidence on the strong demand of international investors, despite downgrades by two international rating agencies this year, said Lian Ping, chief economist with the Bank of Communications.
Standard & Poor’s Global Ratings downgraded China’s long-term sovereign credit rating by one notch to A+ from AA- last month, following a similar cut by Moody’s Investors Service in May.
“The downgrades’ influence on the bond’s price will be limited, as China’s overall foreign debt load is at a lower level compared with other major economies, which is very healthy,” said Lian.
It will set a benchmark for State-owned enterprises’ foreign currency bond pricing and to boost commercial banks’ borrowing from the outboard market, he added.
The last time that the Chinese government issued dollar-denominated sovereign bonds was in October 2004, with a total volume of $1.7 billion.