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China enjoys bumper demand for euro-denominated bonds

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Via Financial Times

China’s first euro-denominated government bond in 15 years has been gobbled up by yield-hungry investors including European pension funds, feeding expectations of further deals.

Beijing’s Ministry of Finance sold a trio of bonds on Tuesday, raising a total of €4bn. There were close to €20bn of orders from investors, according to figures shared with the FT. The issuance will set a new price benchmark after the expiration of the last euro-denominated sovereign bond, which was issued in 2004.

For big investors, the Chinese-issued, euro-denominated bonds provided an opportunity to diversify and grab higher yields than those available in Europe. The bonds had maturities of seven, 12 and 20 years, with yields of 0.197 per cent, 0.618 per cent and 1.078 per cent, respectively. By contrast, a seven-year German Bund yields minus 0.5 per cent.

The deal is likely to encourage further issuance, according to analysts, and sets a price benchmark for corporate bonds. It demonstrated “the depth of market demand for quality Asian issuers”, said Samuel Fischer, head of China onshore debt capital markets at Deutsche Bank, one of 12 banks involved in the deal.

“The transaction attracted not only dedicated [emerging markets] investors, but also European continental pension and insurance names which are welcoming new issuers in the market,” he added.

All three parts of the deal were heavily subscribed, with the €1bn, 12-year bond attracting more than €6.25bn in orders. Offering three tranches had allowed China to target “a range of investor types”, said Sean McNelis, HSBC’s co-head of debt capital markets for Asia-Pacific.

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“The enthusiastic reception to the transaction should open the door for a lot more euro issuance from Chinese corporates and institutions as those issuers look to further diversify their funding strategies,” he added.

The Ministry of Finance was expected to follow up the launch with further deals, as often as once a year, according to one banker involved in the deal.

Beijing is seeking to encourage diversification away from dollar-denominated bonds, both in terms of its own debt and for corporate China, according to analysts.

The vast majority of the country’s foreign currency-denominated debt is in US dollars, across corporates, financial institutions and government agencies. Euro-denominated bonds make up around 5 per cent of the total, according to Dealogic data.

China mandated a dozen banks as managers and bookrunners for the euro bonds. Alongside domestic players Bank of China, Bank of Communications and China International Capital Corporation, international banks Citigroup, Bank of America, Commerzbank, Crédit Agricole, Deutsche Bank, HSBC, Société Générale, Standard Chartered and UBS were involved in the deal.

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