On Tuesday China’s Ministry of Finance launched its largest ever foreign-currency offering, and first euro-denominated issue in fifteen years by way of a three-tranche EUR 4bn deal (~USD 4.4bn). It appears to us that China chose to issue in euros due to cheaper funding costs and deepening financial ties with Europe. Although there have been some suggestions that the currency was chosen in preference to the dollar amid the current Sino-US trade conflict, there have been reports suggesting that China is also looking to issue dollar denominated bonds at the end of the month.
The three tranches were made up of EUR 2bn seven-year bonds, EUR 1bn 12-year paper and a EUR 1bn 20-year issue. Investor appetite was huge, with the deal ~5 times oversubscribed (just under 60% orders from Europe); which helped China tighten from initial target levels. Unfortunately, this deal was not attractive for us, as aside from the hedging costs (~2.25%) the EUR bonds offer little in the way of expected return. Using China’s A1/A+ long-term rating, we calculate that the 1% 2039 issue currently yields only 1.08% and has an expected return around 5.7%. On the positive the bond does have 2 notches of credit cushion.
Staying with China, we also heard some positive news from Gao Feng, a spokesman for China’s Ministry of Commerce who said China and the US have agreed to roll back currently imposed tariffs using a phased approach. Gao said: “If China, U.S. reach a phase-one deal, both sides should roll back existing additional tariffs in the same proportion simultaneously based on the content of the agreement, which is an important condition for reaching the agreement,”. At this stage the US has not commented, but that hasn’t stopped a positive turn for markets with the renminbi breaking through the 7 level against the dollar. We remain cautiously optimistic that a Phase 1 deal will be agreed and signed before the year is up, however, the next phase agreement which includes more contentious issues such as intellectual property rights and the technology sector may see this trade war drag on for some time.