China policy bank sells debt through Bond Connect

Agricultural Development Bank of China, China Development Bank show their support for country's latest connect scheme, but some foreign investors wary of extra currency risk.

Agricultural Development Bank of China (ADBC) became the first issuer on Monday to sell debt through China's new Bond Connect programme, which gives foreign investors direct access to the world’s third-largest bond market without the need for onshore accounts.

The move, another important milestone for Chinese finance, forms part of a broader effort by Beijing to promote the renminbi currency and open up the country’s capital markets to attract a wider range of foreign investor to continue funding the Chinese economy.

“The Bond Connect is an important step of the liberalisation of China’s domestic financial market, as China hopes to gain wider acceptance in international standards,” Pan Gongsheng, deputy governor of the People’s Bank of China, said in a ceremony marking the programme's opening in Hong Kong. “Foreign debt issuers are interested in China’s domestic bond markets as China opens the door wider.”

ADBC initially planned to sell Rmb15 billion ($2.2 billion) of renminbi-denominated bonds, but it later added another Rmb1 billion due to strong demand from offshore accounts. Rmb1 billion was specifically earmarked for international investors to subscribe via Bond Connect, comprising one-year and a three-year maturities, and was oversubscribed 2.52 times, according to a statement posted on the PBoC website. The one-year and three-year bonds paid a coupon of 3.61% and 3.98%, respectively.

In addition, the bank sold a five-year note at 4.13%.

ADBC, which is a subsidiary of the Chinese central bank, is one of China’s “Big Three” policy lenders, with more than Rmb6 trillion in bonds outstanding. Its outstanding debt ranks third after the Ministry of Finance and China Development Bank (CDB), another policy bank.

For the offshore tranche, Bank of China, China Construction Bank, Agricultural Bank of China, Bocom, ICBC, Standard Chartered China and HSBC China were the joint underwriters.

CDB is marketing its three-part renminbi-denoninated bonds, which could raise another Rmb20 billion from onshore and offshore investors on Tuesday. ICBC has also said that it plans to raise fresh funds through the Bond Connect scheme in due course.

North only

Unlike the existing two-way Stock Connects between Hong Kong and the mainland equity bourses of Shanghai and Shenzhen, the Bond Connect scheme only allows investors to trade northbound into China’s $9.4 trillion market. Mainland Chinese investors do not have access to offshore bonds.

“The Bond Connect is more restrictive than the Stock Connect scheme and the China interbank bond market direct-access programme, as it is not available to retail investors and provides no access to onshore hedging facilities at this stage,” Chi Lo, an economist at BNP Paribas, said in a note. Currently the scheme excludes hedge funds too.

Pan said the Chinese authorities will announce a southbound Bond Connect at the appropriate time time but gave no timetable.

In 2014, China first launched a two-way stock connect programme allowing Hong Kong and Shanghai investors to gain access to each other’s stocks. A second one opened for business last year, connecting the bourses of Hong Kong and tech-heavy Shenzhen.

Goldman Sachs recently forecast that more than $1 trillion of additional global fixed-income investment will likely be allocated to China’s domestic bond markets in the coming decade. Currently, overseas investors hold less than 2% of it.

Some market participants remained a tad circumspect due to the additional currency risk -- after all, it's less than two years since the Chinese central bank spooked markets by briefly devalued the renminbi, raising questions over its commitment to a more market-oriented exchange rate. But they recognised the potential appeal for investors located in yield-starved developed markets.

“The size of ADBC’s Rmb1 billion deal is a bit small for international investors,” Andy Seaman, chief investment officer of Stratton Street, a London-based investment firm. “In an environment where the renminbi is stabilised, the yield of the tranches are attractive for European investors.” 

A debt syndicate banker added that investors in dollars have to take a positive view on the value [of the] renminbi as the cost of hedging is costly. “Currency hedging is too expensive as the renminbi bond market as an asset class is not big enough.”

Additional reporting by Christina Wang

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