What happened to China’s dollar bonds sales in 1998? One Hong Kong analyst looks back

A similar US$1 billion bond sale was held in 1998 for global investors, including in Hong Kong.

The previous sale nearly 20 years ago was hailed by Beijing as a sign of international confidence in China’s economic prospects in the aftermath of the Asian financial crisis.

But Joe Zhang Huaqiao, then head of China research at HSBC Securities, told the South China Morning Post that the bond issuance was ‘miserable’ and more like a ‘lose-lose’ transaction.

Zhang called the bonds “too expensive” for the mainland because it did not need the cash, according to the Post.

On the same day his comments were published, Zhang was sacked from the brokerage because he angered some HSBC executive as another unit, HSBC Markets, was one of the bonds’ underwriters, the Post later reported on December 16, 1998.

A lot has changed over the last two decades.

China’s economic size has expanded from US$1 trillion in 1998 to at least US$12 trillion this year, the country’s foreign exchange reserves have surged from less than US$150 billion to over US$3 trillion and the Hong Kong market is now dominated by Chinese institutions.

After Zhang left HSBC Securities, he worked for different organisations including UBS over the next 19 years.

Zhang, now the chairman of China Smartpay, a Hong Kong-listed payment service firm, said he has not changed his opinion that dollar bond sales by Beijing are a meaningless and absurd act, partly because China is now sitting on US$3 trillion reserves.

“My views have not changed even after 19 years,” Zhang told the Post in an interview this week. “It is still ridiculous for Beijing to pay higher interests to bondholders while it is investing in low-yielding US treasuries.”

Zhang questioned why China felt the need to pursue a bond sale for the relatively small amount of US$2 billion.

“It’s like a person trying to borrow two cents and asking people to put an interest on it,” Zhang said. “The smaller the amount, the less the meaning. In an extreme example, if the ministry just tells banks in Hong Kong that I need US$20,000, many banks may just be happy to give it money for free.”

Zhang added that sporadic sovereign dollar sales from Beijing – China has not sold any dollar bonds since 2004 – will not help provide a benchmark for dollar bond sales by Chinese institutions and companies.

“Dollar bonds issuance by Chinese companies boomed while the finance ministry was idle – no one has been looking at the finance ministry to give a benchmark,” Zhang said.

Chinese institutions and companies sold more than 250 dollar bonds last year, raising some US$120 billion.

China’s finance ministry said in a statement on Tuesday that its bond issuance was aimed at setting a “benchmark” for China’s foreign currency bonds and to “help international investors understand China’s economy”. Meanwhile, it was also intended to support Hong Kong as an international financial hub through the dollar bond sales and that raising money was not the main purpose.

“The Chinese government doesn’t have any demand to raise money from abroad,” said the ministry. “Fundraising is not the primary consideration.”

There appears to be little doubt, however, that the China sovereign dollar bond will be in demand.

Hong Hao, research head at Bocom International, an investment banking and brokerage arm at Bank of Communications in Hong Kong, said the bonds would be sold out “in an hour”.

In a sign of confidence in the country’s first dollar sovereign bond sales since 2004, the finance ministry has decided not invite any rating agencies to rate the bonds this time after it was angered by the downgrade by Moody’s and S&P Global Ratings of China’s sovereign rating earlier this year.

The finance ministry, in explaining the bond issuance, reiterated the downgrade by the two rating agencies was a misread of China’s economic fundamentals and development potential.

“China is deliberately giving a cold shoulder to the international rating agencies” as Beijing is unhappy about the rating results, said Shen Jianguang, chief economist at Mizuho Securities Asia.

Beijing has hired 10 joint “lead underwriters” and joint bookrunners, including Citigroup, Deutsche Bank, HSBC and Standard Chartered Bank, along with six Chinese banks, namely Agricultural Bank of China, Bank of China, Bank of Communications, China Construction Bank, Industrial&Commercial Bank of China and China International Capital.

In 1998, the mainland’s bonds were priced 280 basis points over US Treasuries of comparable maturity, after it drew bids worth US$1.8 billion.