China’s first sovereign bond in over a decade poses an obvious question: “What was that all about?” There was a sense of deja vu about the US$2bn two-tranche Global, in that it ticked all the superlative boxes that we have come to expect from a rare sovereign issuer in Asia. But the only element that constrains rampant grandstanding around the deal is the feeling that the issuer could have filled its boots to the max.
With a book of US$21bn for its five and 10-year tranches, China could surely have printed in gargantuan size and gone about constructing a ready-made liquid yield curve in the process.
On the other hand, perhaps the spread-to-Treasuries symbolism attached to the deal - which printed at 15bp and 25bp over respective US Treasury tenor benchmarks - was of such a concern to the Chinese national debt office that the aim was simply to come up with some paper that eventually trades flat to the US government dollar benchmark yield curve.
That hadn’t quite happened as of the close of business last week - from an initial secondary market tightening to plus 8bp and plus 11bp, the paper was hovering around plus 13bp and plus 23bp - but I would strongly suggest that the symbolic US Treasury curve was the target all along.
Mind you, what would that piece of symbolism really achieve? It’s hardly exactly comparing apples to apples to take a relatively scrawny-sized 144A deal and compare it with a deeply liquid on-the-run US Treasury bond.
On the other hand, it would be of significance it this deal were an attempt to build a dollar curve for the Chinese sovereign, not simply an ornamental mug of a deal - a momento to go along with the 20th anniversary of the Hong Kong handover, perhaps.
There is no obvious need in relation to China’s current account balance or renminbi exchange rate to justify such issuance, but there would be some sense in providing a liquid, theoretically risk-free dollar benchmark curve for China’s domestic issuers.
THAT IDEA RESONATES in the context of China’s massive Silk Road infrastructure project, of which I have written much here before, as well as against a backdrop of an acquisitive Chinese corporate sector.
Alright, China tried to rein in some outbound M&A activity earlier this year via regulatory tightening of bank lending and currency transfers for spurious acquisitions. But I doubt that stance will remain in place, as the “Go Out” mindset remains official government policy, and one which carries, as with the recent bond issue, tremendous symbolic weight.
In that context, an ability to disintermediate the big Chinese government-owned banks by tapping buy-out capital via the offshore bond markets is in the country’s best interests.
A liquid China dollar curve, which is well maintained with frequent issuance and widely traded across international financial centers and time zones would be just the ticket in helping Chinese companies access international capital.
Meanwhile, a curve which began to trade flat to US Treasuries would give the China hawks in the White House something more ammunition, to whatever end. China government renminbi debt swaps flat to US Treasuries right now, so that ambition isn’t an especially challenging proposition.
OF COURSE, THE global financial landscape in 20 years’ time is likely to look considerably different than it did at the time of the Hong Kong handover.
Back then, we were months away from the Asian financial crisis and a rethink of the fixed exchange rate regime which had prevailed, unsustainably, in Asia for over a decade. Domestic Asian capital markets had the punch of a mosquito and China had yet to gear up its super-charged economic growth. The regional banking landscape was fragmented and dominated by offshore Western capital.
Twenty years from now I imagine the Chinese government bond market will be the global risk-free benchmark, capital raising in renminbi will outpace that in US dollars and the liquid US dollar bond curve put together by China to help fund its overseas ambitions - as imagined above - will have long ago been asset-swapped to deep illiquidity.
Whatever the case, you can see evidence of the new order everywhere in Asia, and no more so than in Hong Kong where the recent bourse delistings of Glencore and luxury goods manufacturer Coach signal a flagging dynamism of that exchange.
Add in the winding down of CIMB’s Hong Kong operation with the stated grumble that North Asia is too competitive a place to conduct viable business and you ask all kinds of questions about China’s master plan for the relationship between Shanghai and Hong Kong. “Plan? What plan?” you might say. But I’m rather convinced there is one.
