China prices for perfection with dollar bond awaited

The state of the union is strong in China. The nation not only holds $1.1 trillion of US debt, it’s also able to issue bonds, in
dollars, at the same price as
Treasuries.
The Ministry of Finance announcement this week that it plans to sell $2 billion of dollar bonds marks China’s first offering in that currency since 2004. The securities will be listed on the Hong Kong stock exchange.
Currently, the market is using a South Korean issue as the benchmark. That $1 billion of 10-year dollar securities was sold in January with a 2.75 percent coupon, just 55 basis points above comparable Treasuries at the time. While South Korea is rated AA-, two notches above China’s A+, the scarcity value means Beijing’s issue could do just as well.
The way these bonds are being sold, though, China could achieve an even smaller spread over Treasuries — or if it wanted, no spread at all.
The two offerings — $1 billion of five-year notes and $1 billion of 10-years — are tiny. The nation’s investment-grade companies have issued close to $35 billion in dollar bonds in the five- to 10-year maturity range so far this year. State Grid Overseas Investment Ltd., a quasi-sovereign, sold $10 billion of such securities in May alone.
There’s so much liquidity in the market that the new offering will be easily absorbed. Last month, when SoftBank Group Corp., a high-yield issuer, offered $2 billion of five-year dollar notes, investors could get as much as 80 cents in loans from their brokers for every dollar they bid, people familiar with the matter told me. Investors buying the Ministry of Finance dollar bonds will be able to command 90 percent leverage — in other words, a $100 million fund could gobble up the whole 10-year tranche.
Fast money can still make a nice carry, even if China comes to market with no spread over Treasuries. Right now, brokers in Hong Kong are offering repo loans at just 40 basis points above overnight Libor, or 1.6 percent. The 10-year U.S. benchmark security yields 2.32 percent.
This sale comes at a politically sensitive time. The Communist Party will host the 19th Congress next week, with a once-in-five-years reshuffle of the leadership. The finance ministry obviously doesn’t need the $2 billion proceeds; its issues are meant as offshore benchmarks to help heavily indebted state-owned enterprises price their dollar sales better.
Dollar bonds seem the way to go. The US currency is cheap, and the Federal Reserve is in no hurry to raise rates. SOE bosses with overseas investment arms will surely want to do the right thing and help China build its benchmark. Already, dollar spreads for quasi-sovereign borrowers like State Grid have tightened since the Ministry of
Finance announcement.
The ministry says the issue will come soon — perhaps even before the party congress, as a demonstration of its prowess?
A little modesty might be in order, however, lest President Donald Trump is inclined to tweet that China is now manipulating bond markets.

—Bloomberg