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Sovereign bonds to bolster opening-up

Chen Jia
Updated: Oct 25,2017 7:37 AM     China Daily

The Ministry of Finance will kick-start its plans to issue US dollar-denominated sovereign bonds worth $2 billion by holding investment and financing discussions with potential investors in Hong Kong on Oct 25.

Half of the $2 billion in debt will consist of five-year bonds and the other half will be 10-year bonds. It would mean a reopening of the financing channel connecting the international capital markets by adding an important investment and risk-hedge instrument, said a statement released on the ministry’s website on Oct 24.

The bond offering will support a much more balanced structure of China’s sovereign bonds, said the statement.

It would also be the first time that the Chinese government has issued US dollar-denominated sovereign bonds in the last 13 years.

The last offering of a similar bond was for $1.7 billion.

“The priority is not to raise capital, as there is no strong need for the Chinese government to borrow from overseas based on its current stable economic growth and supplementary foreign exchange reserves,” according to the ministry. “So this time the total issuance amount is not quite large. The funds that would be raised will be used for general government expenditure.”

The bond issue is more of an indication that the country’s financial sector will be further opened up to global investors, while also fulfilling the purpose of international financing to support the development of China’s real economy, said Liang Hong, chief economist with China International Capital Corp.

The ministry’s statement said that there has been strong demand from international investors for China-issued sovereign bonds, as the issuer has strong economic foundations as well as a top-level credit rating among emerging markets. “Global investors are willing to better understand the development situation of China’s whole economy and financial sector,” it said.

Lian Ping, chief economist of Bank of Communications, said the issue would set a bench mark for China’s sovereign bond pricing and improve the foreign currency-denominated bond’s yield curve.

It is also expected to improve financing efficiency for Chinese enterprises when they need to raise funds from global capital markets, said Lian.

By the end of last year, the foreign debt of China’s central government totaled $18.1 billion, accounting for 1.06 percent of total Treasury bonds.

Nearly 85 percent of the foreign debt is yuan-denominated which was issued in the offshore market.

“China’s current foreign debt ratio is much lower than the international level,” the ministry said.

By choosing to launch the bond issue in Hong Kong, the central government has also reaffirmed its commitment to maintain the region as a global financial center, the statement said.