China’s Ministry of Finance has announced it plans to issue $2 billion worth of bonds denominated in U.S. dollars. The proposed bond issue will be made in Hong Kong and it will comprise an equal amount of five year bonds and ten year bonds.
The People’s Bank of China reportedly “encouraged” Chinese banks in January this year to issue more U.S-denominated debt when raising funds. Some commentators saw this move as a response to a significant fall in Chinese foreign exchange reserves during the latter part of 2016. This latest move by the Ministry of Finance would appear to be consistent with the PBoC’s earlier directive.
source: TradingEconomics.com, PBoC
The Chinese Government already has around USD$18 billion of U.S. dollar bonds on issue, as well as some euro-denominated debt but these amounts are tiny in comparison with the Chinese Government’s total outstanding debt. According to a Ministry of Finance official, the purpose behind the bond issue was to “guide markets and evaluate prospects in the future”.
It would seem as if the PBoC plans to acclimatise international markets to USD-denominated Chinese debt, as this latest bond issue would be the first since 2004. It raises several questions. Is it a precautionary move in case domestic demand for Chinese Government debt dries up? Or is it simply part of a plan to broaden the appeal of Chinese Government debt to international investors? A more conspiratorial explanation suggests such a move may be the beginning of “synthetic” reduction of its U.S. treasury bond exposure without actually selling U.S bonds.
According to the U.S. Department of the Treasury, at the end of September Chinese interests held USD$1.2 trillion treasury bonds and notes, while Hong Kong interests held another USD$200 billion.