China Borrows at Negative Rates for the First Time -- Update

11/19/2020 | 12:08pm

By Frances Yoon and Anna Hirtenstein

Superlow interest rates in Europe helped China to sell its first negative-yielding debt, as it raised about $4.7 billion in a three-part deal in euros.

The debt sale drew robust demand, aided by China's rapid return to economic growth after tackling the coronavirus and the relative scarcity of Chinese bonds denominated in the common currency.

The deal was worth EUR4 billion, the equivalent of $4.74 billion, and split between 5-, 10- and 15-year bonds. The 5-year bonds were priced late Wednesday to yield minus 0.152%, while the 10- and 15-year securities were sold with positive yields of 0.318% and 0.664%, respectively.

This is the first time that China has sold negative-yielding debt, according to Dealogic.

Investors placed total orders of about EUR18 billion, said Samuel Fischer, head of China onshore debt capital markets at Deutsche Bank, one of the banks that handled the deal.

"People want more exposure to China," Mr. Fischer said. "China's financial markets are opening, but there is still a broad scarcity of the sovereign [debt] among investors. The story of China's Covid[-19] turnaround and the resilience of its economy are also things people like."

Fund managers are willing to buy bonds that offer negative yields in part because they are betting that the European Central Bank will continue scooping up the debt, allowing them to sell the securities for a profit. Government bonds also offer safety and liquidity, or the ability to quickly swap them for cash at a fair price, even if they don't pay coupons.

The yield on the 5-year bonds sold by China this week was attractive to European investors because it is less negative than other comparable government debt in the region. For instance, the yield on 5-year German bunds was minus 0.746% on Wednesday.

"You can think of it as a yield grab: you are starved for return and any opportunity you get to pick up some extra premium on a yield, you're going to buy that up quite quickly," said Rohan Khanna, a rates strategist at UBS.

James Athey, an investment manager at Aberdeen Standard Investments, said borrowing in euros had other benefits, as well as low interest rates. "China also wants to be less reliant on the U.S. and U.S. dollar markets," he added.

Debt with a market value of some $16.9 trillion is trading at negative yields, according to the ICE BofA Global Broad Market Index, a benchmark for the world bond markets.

China has become a more active international borrower recently. Last November, it sold bonds in euros for the first time since 2004. And a month ago, it raised $6 billion by selling new dollar bonds, matching a record set last year.

China's economy grew 4.9% in the third quarter from a year earlier, moving back toward its pre-coronavirus trajectory. The International Monetary Fund said in October it expected China to be the only major economy to grow this year, expanding 1.9%.

Public debt has ballooned around the globe as countries raise funds to fight the pandemic. Moody's projects that China's public-sector debt, including borrowings by governments and state-owned enterprises, will rise to 185%-190% of gross domestic product in 2020-2021 from 167% in 2019.

Andrew Mulliner, a bond portfolio manager at Janus Henderson, said most countries' debt-to-GDP ratios had increased substantially, so it was important to focus on a country's ability to control and pay off the debt. "What's become increasingly apparent is that these high debt loads aren't necessarily a problem if you've got a captive central bank," he said.

International bond-index compilers Bloomberg LP, FTSE Russell and JPMorgan Chase & Co. have all moved to add Chinese government debt in yuan to some key indexes. That has helped fuel international appetite for China's domestically issued sovereign bonds.

"China's also benefiting currently from big inflows from people being forced to own their bonds anyway through indexation," said Mr. Mulliner.

Write to Frances Yoon at and Anna Hirtenstein at

(END) Dow Jones Newswires

11-19-20 1207ET

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