China scoops a fistful of euros

China returns to the euro-denominated bond market for the first time in 15 years. But how much has really changed since its last outing?

The People’s Republic of China returned to the euro-denominated bond market for the first time in 15 years on Tuesday with a deal that showed how radically the country has changed over the past decade-and-a-half, but how little its borrowing strategy has. 

One thing that no one doubts is just how much larger and more powerful an entity China is in 2019 compared to 2004, although in ratings terms it has only gone up a few notches from BBB+/A2/A- to A+/A1/A+.

The country’s growing financial clout, combined with the rarity value of its credit, is reflected in the amount it has raised this time round: €4 billion compared to €1 billion back in 2004. In 2019, China has also issued three tranches with seven, 12- and 20-year maturities compared to a single 10-year maturity back in 2004.

Debt capital markets bankers commented that the issue size and final €19.7 billion-strong order book were large even by modern EM sovereign bond standards. The deal had a split of: €8.7 billion for the seven-year, €6.7 billion for the 12-year and €4.3 billion for the 20-year.

“This deal ticked all the boxes,” said one London-based syndicate head. “It’s unusual for an emerging markets sovereign to get the size, the multiple tranches, the order book, the tight pricing and the diversified investor base all in one as this one has.”

As a sovereign entity, China does not access the international bond markets very often. Its latest euro-denominated deal marks only its fourth outing following earlier transactions in 2001, 2003 and 2004.

It has a past history of fairly punchy pricing and the same was true this time round too. However, bankers said investors were happy with the pick up relative to negative-yielding European comparables, while the issuer was satisfied with pricing flat to slightly through secondary market dollar levels on an after-swap basis.

They added that the seven-year tranche was the most tightly priced of the three, coming in slightly through the secondary market dollar curve. The 20-year came flat to slightly through the dollar curve, while the 12-year was flat.

Most investors used Israel as the nearest comparable since it has the same rating as China from Moody’s and Fitch, but a one-notch higher rating of AA- from S&P. Bankers said that China priced flat to Israel’s interpolated curve in seven years, flat to slightly through in 12 years and a bit further through again in 20 years.

One of the biggest changes between 2004 and 2019 is the absolute funding levels that China has been able to achieve.  

This is because quantitative easing (QE) was a term only understood in Japan at the turn of the century (the country introduced it in 2001). At that point, China’s 2004 deal carried a 4.25% coupon and was priced at 52.8 basis points over Bunds and 40bp over mid-swaps.

Europe is now living in a world where the European Central Bank re-introduced QE on November 1 and over a third of euro-denominated corporate bonds are carrying negative yields.

Consequently, China’s latest three-tranche offering was respectively priced with coupons of: 0.125%, 0.5% and 1%. This equates to yields of: 0.197% based on an issue price of 99.5%, 0.618% on an issue price of 98.639% and 1.078% on 98.603%.

In terms of mid-swaps, this pricing represented respective spreads of 30bp, 40bp and 58bp. Relative to Bunds, the deal came in at 70.8bp over, 93.1bp over and 108.9bp over.

“This is a good time to raise euros at the 20-year point of the curve, since the swap rate is currently at 48bp compared to levels in the high 1% range over the past few years,” one European DCM banker commented. “This means China has locked in funding at 1.06% all-in.”

When it comes to currency considerations, few analysts would be willing to hazard a guess about where the renminbi will be relative to the euro in 20 years time when the longest tranche matures. What can be said is that China timed its previous deal very well since it was executed just as the euro was peaking.

In 2004, the euro/renminbi exchange rate averaged 10.3 and the renminbi was still pegged to the dollar (it was floated in July 2005). It currently stands at 7.85, with the euro strengthening against the renminbi since March.

The biggest change between 2004 and 2019 is how China’s domestic bond market has grown from under $1 trillion in outstandings then to $13.7 trillion at the end of the first quarter of this year.

In Europe, meanwhile, issuance levels have remained fairly static. Some €1.1 trillion was raised in 2004 according to Bloomberg data and €1.4 trillion year-to-date.

The percentage of non-Europeans accessing the market has also only climbed a modest eight percentage points from 20.8% to 29%.


China’s power on the global stage has risen immeasurably in trade terms over the past 15 years. But the dollar’s pulling power has not really diminished over the same period, nor has its psychological hold over Asian borrowers.

The latest Bank of International Settlement figures from April this year show that the greenback accounted for 88% of the $6.6 trillion traded each day on the foreign exchange markets. China came in eighth on 4%.

Even when it comes to Belt & Road financings, it is estimated that only 14% are transacted in China's currency.

Plenty of commentators view China's latest euro offering as a sign that the government wants to diversify its funding sources away from the dollar. They wonder whether the sovereign’s deal will encourage more Chinese borrowers to follow suit.

However, FinanceAsia was wondering the same thing back in 2004 and nothing has really changed since then. Perhaps this time will be different.

European investors are certainly more knowledgeable about China now and more willing to hold its credit, particularly given the pick-up offered over European comparables. Are Chinese investors more willing to take advantage of it? 

Dealogic figures do show that Chinese entities have become more active in euros over the past six years (see table 1). But this year’s €7.8 billion fundraising total still only represents 5% of what they have raised in dollars.

Table 1: Euro-denominated issuance by Asian credits

  China   ASIA TOTAL  
Priced Year Deal Value USD (m) (Proceeds) No. Deal Value USD (m) (Proceeds) No.
2004 1,851 3 5,077 12
2005     7,166 19
2006     6,059 14
2007     2,964 6
2008     2,102 4
2009     2,591 1
2010     1,026 1
2011     142 1
2012     3,097 6
2013 1,413 2 8,893 19
2014 3,316 6 13,397 23
2015 11,672 22 14,226 33
2016 9,379 13 19,087 25
2017 15,883 22 23,364 41
2018 11,823 25 25,202 66
2019 YTD 7,841 24 21,012 45
SOURCE: Dealogic

However, one very notable change since China first accessed the euro markets back in 2001 is how  the country’s own banks have internationalised. The current syndicate numbered three domestic financial institutions.

By contrast, China's very first €400 million four-year deal had none. It also had no European banks either until France’s then president, Jacques Chirac, intervened right at the eleventh hour with his Chinese counterpart, Jiang Zemin, enabling Barclays, BNP and Deutsche Bank to join the three US investment banks that had already been mandated on the dollar tranche.

Joint bookrunners and joint lead managers in 2019 were: Bank of ChinaBank of CommunicationsCICCBank of AmericaCiti, CommerzbankCredit AgricoleDeutsche BankHSBC, Soc GenStandard Chartered and UBS.

Final deal stats showed that the seven-year attracted an €8.7 billion final order book including €2.16 billion in interest from syndicate banks.

By investor type, the tranches split central banks and official institutions 34%, banks and private banks 31%, asset managers 26%, pension and insurance funds 7%, hedge fund and others 2%.

By geography, 9% went to the UK, 8% to Germany, 37% to other Europe, 38% to Asia and 8% to offshore US and the rest of the world. 

The 12-year tranche had an €6.7 billion final order including €990 million from the lead managers. Here banks and private banks took 39%, asset managers 39%, central banks and official institutions 9%, pension funds and insurers 9%, hedge funds and others 4%.

By geography, the UK took 12%, Germany 11%, other Europe 30%, Asia 34% and offshore US plus the rest of the world 13%. 

The 20-year tranche had an €4.3 billion final order book including €585 million from the joint leads. In this tranche, asset managers took 42%, pensions and insurance funds 22%, banks and private banks 20%, central banks and official institutions 13% and hedge funds and others 3%. 

By geography, Germany took 27%, the UK 19%, other Europe 27%, Asia 25% and offshore US and the rest of the world the remaining 2%.

This story has been updated since publication with final deal stats.

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