China has been in the news a great deal this week, with the announcement, at the Communist Party’s quinquennial Congress, of the next cadre of leadership alongside President Xi Jinping.

However, China did something else significant this week too, and even more infrequent than a once every five year event, although it attracted considerably less attention.  The country issued its first sovereign bonds denominated in U.S. dollars since 2004. Eventually priced at 15bps over the U.S. Treasury curve at the five year point, and 25bps over the U.S. Treasury curve at the 10 year point, the new deals represented competitive pricing for the Chinese sovereign.  Of course, with each deal capped at $1bn in size, and given the infrequency of China’s appearances in the dollar bond market, the new bonds enjoyed considerable demand. The order book across the two deals was over $22bn in size.

Why did China, a country with over $3 trillion in reserves, need to borrow $2bn?  Well, it didn’t.  The intention of these new bonds is almost certainly to support the pricing of the existing dollar debt issued by China’s many and varied SOEs (state-owned enterprises).

Unlike their sovereign, these SOEs are not shy about coming to the market.  At the last count, some $75bn of Chinese quasi-sovereign bonds were to be found in the main EM dollar-denominated sovereign debt index.  With spreads of these issuers trading, on a simple average basis, at around 90bps, China will feel its new sovereign bonds can reduce their borrowing cost.  After all, SOEs in regional peer South Korea can trade as tight as 20bps over their sovereign.

The new deal makes sense then, though legitimate questions can be asked as to what extent a $2bn of bonds can, by themselves, deliver fair pricing for an $11 trillion dollar economy.  All the same, we expect Chinese SOE bonds to enjoy pricing support as a result of this transaction, and unlike the sovereign, the SOEs will keep on issuing…