BEIJING, Oct 27 — China saw strong appetite yesterday for its first sale of sovereign dollar bonds since 2004, with demand for the sovereign notes climbing to 11 times the offering size and pricing coming in under initial guidance.

The Ministry of Finance priced the bonds 15 basis points over Treasuries for its US$1 billion (RM4.23 billion) of five-year notes, from an initial guidance of 30-40 basis points announced earlier yesterday. The 10-year notes were priced at 25 basis points, from the initial guidance of 40-50 basis points, according to people familiar with the offering, who aren’t authorized to speak publicly.

While China for years had sought to reduce the role of the US dollar in the global financial system, it’s approach has evolved since a flubbed devaluation of the yuan in 2015 that showcased to its officials the dangers of allowing global market forces greater rein.

In a "if you can’t beat them, join them," move, Chinese entities are now selling dollar bonds in record amounts, tapping their own holdings of dollars accumulated from current-account surpluses.

The surge in issuance — some US$147 billion so far this year — in turn helped to prompt the Finance Ministry to sell sovereign securities to serve as a benchmark that could help reduce borrowing costs for state-owned and quasi-government enterprises.

Indeed, the prospect alone of these notes already started reducing corporate yields weeks ago.

"Some state-linked entities have already tightened in anticipation that the sovereign deal will price tight,” said Sandra Chow, a senior analyst in Singapore at research group CreditSights, referring to expectations for low premiums compared with US Treasuries.

Drop in ocean

The demand for the bonds suggests China would have plenty of scope to build out a full yield curve of securities in the US currency if it wanted, to serve as a benchmark for its state-owned and quasi-government issuers.

"Two billion dollars is a mere drop in the ocean of the potential appetite globally for these bonds," said Jethro Goodchild, the Singapore-based head of Asian credit at Aviva Investors.

One potential use of dollar bonds sold by state enterprises and banks is funds for President Xi Jinping’s signature global initiative -- the "belt and road” project designed to deepen economic ties between China and Asian, European and African nations. The yuan still makes up a minority of China’s trade, emphasizing the role of the dollar.

Somewhat unusually, China didn’t seek a specific rating for the notes it sold, in a move that investors took to be a retort to the sovereign downgrades that Moody’s Investors Service and S&P Global Ratings announced earlier this year. In each case, officials disputed the moves, which the companies said were driven by China’s continuing buildup of debt. The two agencies have China at the fifth-highest investment rating.

The move to forgo seeking a specific rating for the sale probably has little consequence for the broader market. Corporate issuers -- especially those seeking international investor participation or mounting large multi-billion dollar sales -- probably will continue seeking grades, experts said. The strength of demand for Asian dollar bonds has allowed others to sell without a grade, and has also spurred a slew of lower-rated issuers to come to market.

"The US$2 billion issuance just sends a signal that China disagrees with the rating downgrades,” said Anne Zhang, executive director for fixed income, currencies and commodities at JPMorgan Private Bank in Hong Kong.

"There might be more first-time issuers considering selling without a rating, but it’s not because the sovereign came without a rating, it’s because there is enough demand.”

Within as few as three years, some 80 per cent of the Asian market outside Japan is likely to be Chinese, according to Goldman Sachs Asset Management. The overall size is already well on the way to US$1 trillion.

The vast majority of sales nowadays are taken up by Asian buyers.

For example, when Postal Savings Bank of China Co sold US$7.25 billion worth of dollar debt last month, only 3 per cent went to non-Asians. — Bloomberg