(Yicai Global) Oct. 16 -- The USD6 billion in sovereign bonds China issued in Hong Kong yesterday, the first occasion the country has sold dollar debt directly to US investors, were oversubscribed nearly five times.

The yields on the three, five, 10 and 30-year notes was 0.425 percent, 0.604 percent, 1.226 percent and 2.31 percent, respectively. They were priced at more than 25 basis points below the initial price guidance, marking the lowest rate set by the Ministry of Finance in four years.

The debt sale drew USD28 billion in orders, 4.7 times the issue, according to the ministry, as China’s economy continues to stage a rapid recovery from the impact of the coronavirus.

China will be the only major economy to expand this year, the International Monetary Fund reiterated on Oct. 13 as the Washington-based organization raised its annual growth forecast for the world’s second-largest economy to 1.9 percent from a 1 percent prediction made in June.

Chinese equities are rising and domestic consumption rebounded strongly during the just-past National Day week-long holiday, factors that provided fertile ground for the issue, Samuel Fischer, head of China debt capital markets at Deutsche Bank, told Yicai Global. The offering drew the attention of many investors in the early stage, and market optimism has also positively impacted it.

US Standards

The sale was the fifth foreign currency-denominated offering since China reinstated its offshore debt sales program in 2017. It is also the first time the country has adopted both the US Securities and Exchange Commission’s Regulation S and Rule 144A in an issuance.

Overseas US dollar-based bond sales generally follow these standards. The main difference between the two is whether the bond can be issued to qualified institutional investors in the US. Rule 144A applies to bonds issued to qualified institutional investors in the US onshore market. Reg S has looser disclosure requirements that allow the bonds to be issued in the US offshore market.

Rule 144A amends the Securities and Exchange Commission restrictions on trades of private offered securities so that these can trade among qualified institutional buyers with shorter holding periods -- six months or a year -- rather than the usual two-years. Reg S exempts “offers and sales of securities that occur outside of the United States” from the registration requirements of Section 5 of the Securities Act of 1933.

China’s finance ministry adopted Reg S or Rule 144A to include both onshore and offshore qualified investors in the US.

Index Inclusion

China’s bond market, the world’s second largest, is set to become even more attractive to overseas investors. FTSE Russell announced on Sept. 24 that it would add China to its flagship World Government Bond Index from October next year. It is the third major global bond index compiler after Bloomberg Barclays and JP Morgan to include Chinese government debt.

FTSE Russell’s decision to add the debt to its influential benchmark may attract as much as USD170 billion of additional funds into China’s bond market by the end of 2022, the macro strategy team at Standard Chartered Bank China said in a note at the time.

The lead bookrunners on the USD6 billion sovereign bond sale included Deutsche Bank, Bank of America Securities, Citigroup, Standard Chartered Bank and Bank of China, China Construction Bank and China International Capital Corp.

Editor: Ben Armour