Beijing seeks to take advantage of low interest rates to diversify away from dollar debt.
China is poised to raise up to €4bn from the country’s first euro-denominated sovereign bond issuance in 15 years, as Beijing seeks to take advantage of record-low interest rates to diversify away from dollar debt amid trade tensions with the US.
The issuance, which will price next week, is expected to raise between €3bn and €4bn, according to people with knowledge of the matter, and will create a new pricing benchmark after the expiration of the last euro-denominated sovereign bond, issued in 2004.
“The Chinese government wants to encourage the global system to shift away from reliance on the dollar,” said Julian Evans-Pritchard, Senior China Economist at Capital Economics.
“In itself this isn’t going to make much difference, but it’s the kind of small step you could take with that goal in mind.”
By establishing a price benchmark, any sovereign issuance would facilitate corporate issuance and help to wean Chinese companies off dollar-denominated bonds.
Earlier this year, a decision in a US appeals court raised the prospect that Shanghai Pudong Development Bank, which has close to $1tn in assets, could be cut off from dollar-denominated funding for failing to provide records on a Hong Kong-based company allegedly used to evade US sanctions.
Beijing is keen to reduce Washington’s leverage in China’s business sector.
The overwhelming majority of China’s foreign-currency denominated debt, across corporates, financial institutions and government agencies, is in US dollars. Dollar bonds account for $653bn, or 77 per cent of the total of $849bn in outstanding Chinese foreign-currency bonds. Euro-denominated bonds make up less than 5 per cent of the total, according to Dealogic.
Dollar issuance has not slowed in recent months and China’s Ministry of Finance will also be issuing more dollar bonds alongside the euro-denominated bonds. Of the $192bn of Chinese foreign currency-denominated bonds issued this year by corporates, financial institutions and government agencies, 92 per cent, or $177bn, were in US dollars, according to Dealogic data.
But the issuance of euro-denominated bonds after a decade-and-a-half-long hiatus indicated growing “Chinese fear that the US controls the global financial system, and they might get locked out,” according to Christopher Balding, a professor at Fulbright University Vietnam.
In the event that dollar access was restricted, Europe might provide a more easily accessible alternative market, he added.
The move was likely to have been triggered by technical, rather than political, factors and did not signal a decoupling from the US bond market, said Logan Wright, director of China research at Rhodium Group.
“You could see why China would want to issue euro bonds because of the decline in interest rates in the eurozone, and also to facilitate corporate issuance,” said Mr Wright.
China has mandated a dozen banks as managers and bookrunners for the euro issuance, including Bank of China, BofA Securities, Citigroup, Deutsche Bank, HSBC, Standard Chartered and UBS.
The issuance would help expand the market for euro bonds, but pulling away from dollars was far from straightforward, said Mr Evans-Pritchard. “Chinese firms doing overseas projects need dollars [and] even Belt and Road Initiative projects are funded in dollars,” he said, referring to China’s ambitious global infrastructure undertaking.
While there was “no way China could move away” from US dollar bonds, Beijing might be “trying to fire a shot across the bow” of the US, said Mr Balding.
A follow-up salvo might be to issue an increasing proportion of debt in euros rather than dollars, while the ultimate move would be to peg the renminbi to the euro instead of the dollar, he added.