China's bonds welcomed on international markets

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Last updated at: (Beijing Time) Thursday, October 30, 2003

China's bonds welcomed on international markets

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The issuance of Chinese government's $1.5bn dollar and euro-denominated bonds attracted wide attention from the financial community shortly after its landing on the international market on October 22. The Britain-base Financial Times carried a comment entitled "Beijing bond issue dazzles market", saying that investors' confidence in China comes from its economic power. A Dow Jones Newswires report named "Investors rush to buy China's global bonds" said both US and European bankers believe that China's global bonds are backed by its strong economic growth.

This time's issuance is a combination of US$1 billion worth of 10-year US dollar-denominated bonds and 500 million euros worth of five-year Euro-denominated bonds. The scale and term are made in accordance with the actual conditions of the sovereign bond market of Asia, said Financial Times. Before the issue, some international investment agencies predicted good prospects, saying China is now of political stability, ever-increasing economy and rich forex reserve and, what's more, the bond is issued at the right moment. The dollar portion would be offered at 55 basis points over US treasuries, they estimated, and the euro tranche at seven basis points above Euribor, the rate at which European banks lend to each other. The spread is the lowest-ever for an Asian issuer apart from Japan, with the dollar tranche priced roughly at the same level as that of US agencies, which have an implicit government guarantee. Low interest rates means less pay to investors, good credit and low issuance costs.

China launched its first bond on the international market two years ago. At that time, because of the coalition between a Chinese fighter jet and a US reconnaissance plane, some US politicians and activists were calling for a boycott of Chinese assets. The Chinese government later decided to issue the bond in Europe, which turned out a success, with buyers mainly coming from Europe and Asia. This time the issuance bears more advantage either viewed from its time or China's economic fundamentals. On October 22 Standard & Poor gave the new bond a BBB rating considering China's sound debt level and good results of economic reforms. It is expected that by 2003 China will reduce its percentage of foreign debt in current account revenue to around 42 percent, thus cutting the percentage of overall debt in current account revenue to around 15 percent. In a few years to come, China's policies encouraging foreign fund will continue to sharpen its competitive edge on international markets.

The moment for issuance is well chosen. Firstly, interest rate is universally low at global financial market, with the Federal Reserve having cut the interest rate of the US dollars to the lowest in 45 years, which makes investors rush to bonds of emerging markets, thus raising bond prices and reducing issuance costs. Secondly, some international credit rating agencies recently boosted their rating for China's sovereign bond. The Moody's Investors Service last week updated China's rating one notch from A3 to A2, being its first adjustment since 1993. Moody stressed two facts when announcing the news. First, for the first nine months of this year the Chinese government put in 40 billion-strong US dollars to boost economy at home; second, in September China's forex reserve hit a record of 383.9 billion dollars. While Standard & Poor, another rating agency, lifted in last April the sovereign credit outlook of China's long-term foreign debts from BBB "stable" to "positive", being the first of its lift in four years. Improved rating will surely help us reduce the insurance costs.

The Chinese government aims differently from its first bond issuance in 2001. Now China's forex reserve has reached a record level. Statistics from Standard and Poor also showed that in 2003 China has a debt service amount only accounting for 15 percent of its current accounts revenue, or eight times of short-term debts, being one of the world countries of highest forex reserve levels. That is, China is not issuing bonds because it lacks money. In recent years, with the deepening reforms and opening up, more and more enterprises desire not only go public, but issue bonds overseas.

The issuance has two purposes. One is to establish a benchmark interest rate of the government bond, based on which enterprises could decide their own rates. The other is to serve as a reference for domestic enterprises in estimating issuance costs on international markets, since with ripening conditions more and more Chinese companies will raise funds on international bond markets.

By People's Daily Online

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