China preps rare $3 billion bond, seeks global vote of confidence amid trade war

By Noah Sin

HONG KONG (Reuters) - China is testing global investors' appetites with plans for a rare sovereign bond issue this month even as U.S. tariffs threaten to put more pressure on its slowing economy.

The $3 billion deal would be only the third U.S.-dollar denominated issuance by China in the last 14 years. It returned to global markets in October last year for the first time since 2004.

The latest bond sale comes at a time when China and the United States are locked in a bitter trade dispute, with no signs of either backing down.

Two sources with direct knowledge of the deal have said China will likely approach investors with a five-year, 10-year and 30-year tranche next week. An investor conference call is scheduled on Oct. 9. [L8N1WJ0G4]

 

"Last year, China sold the dollar bond without a rating (after getting downgraded by Moody's and S&P)," said a credit analyst at a Hong Kong-based brokerage.

"This year, again, they are trying to portray that the (sovereign) credit is really strong, even with the trade dispute going on."

Given its rarity, demand for the Chinese debt could be as strong as seen last year, presuming that the size of each tranche is set at $1 billion, said a syndicate banker for Asia at an international bank, who is not involved in the deal.

Investors placed orders for more than 10 times the amount on offer last year, when China raised $2 billion. [L4N1N11EL]

The 30-year tranche, which was not on the table in 2017, will be the one to watch, the banker said.

"You could get to a coupon north of 4.5 percent. That is very attractive. You will also have a lot of Chinese banks participating in the deal."

But while the deal is expected to be well supported, China may find it harder to repeat the tight spread it achieved last year, said the credit analyst.

"The economy is a lot more bearish than last year," he said.

"It is difficult to see if the spread will deserve to be as tight, and whether the credit risk profile for sovereign China remains as strong."

Investors will likely use the two dollar bonds issued by China last October, which carried the same tenors, and a 30 year note by the Republic of Korea [50064FAN4=], as comparables, said one of the sources with knowledge of the deal.

The 10-year portion was trading at 3.63 percent on Thursday. It was sold at 2.62 percent last October.

The Chinese Ministry of Finance has mandated 12 banks, including international banks such as Deutsche Bank and Goldman Sachs, to underwrite this deal. An investor meeting will take place on Oct. 9.

China is also selling 4.5 billion yuan ($655.2 million) of offshore yuan bonds next week. [L4N1WJ264]

($1 = 6.8680 Chinese yuan renminbi)

(Reporting by Noah Sin; Editing by Kim Coghill)