China to open bids for 5b yuan treasury bonds

China's Ministry of Finance announced on Wednesday it will start the bidding for 5 billion yuan ($760 million) in yuan-denominated treasury bonds on July 5, and the bonds will be issued in Hong Kong in the near future.

The bonds will compose three parts: 3 billion yuan with two-year maturity, 1.5 billion yuan with five-year maturity, and a remaining 0.5 billion yuan that will be a placing part for central banks, which have an option to choose either of the two maturities, according to a document from the Ministry of Finance.

The interest rates of each series of bonds will be determined in accordance with a competitive tender as described in the Tender Information Memorandum dated on or about June 27, said the document.

The bidding results will later be published by the Hong Kong Monetary Authority, it said.

The Bank of Communications Co Ltd Hong Kong Branch was named as the fiscal agent and issuing and lodging agent, on behalf of the Ministry of Finance, showed the document.

The ministry issued a statement on Tuesday that it would issue yuan-denominated treasury bonds worth 5 billion yuan in Hong Kong in the near future.

It will be the first of two rounds of overseas yuan-denominated treasury bonds issued by the ministry this year. The second round will also be worth 5 billion yuan and be issued in Hong Kong, the ministry said, without giving a specific timetable.

Given the total amount of 10 billion yuan of offerings, the country's gross issuance of yuan-denominated treasury bonds in offshore markets continues to decline this year from 14 billion yuan in 2017 and 31 billion yuan in 2016, as the market called it "a lighter-than-expected supply" this time.

It may not be the perfect timing for dim sum bond issuance, some experts said, as the recent weakening of Chinese currency may stagger investors, who are reluctant to take on risk amid market uncertainties as the Sino-US trade tension escalated.

On Wednesday, the spot exchange rate of offshore yuan softened for the 10th consecutive trading day to 6.6164 per dollar, the lowest level since Dec 20, after it lost nearly 3 percent in the last two weeks.

"We shouldn't discount the fact that there has been a broad-based US dollar rally across the foreign exchange markets over the second quarter, at the same time that trade war concerns have intensified," said Jameel Ahmad, Global Head of Currency Strategy and Market Research at FXTM.

As the first offering of 5 billion yuan is a relatively small batch, the ministry feels no pressure on the market demand at the moment, and the influences from a weaker yuan could be limited, according to an official close to the matter.

"We expect the auction to be very well received, on light supply of high quality dim sum bonds so far this year and likely accommodative offshore yuan's liquidity conditions," according to a research note of Standard Chartered Bank (HK) Ltd.

"Any measure to further improve the liquidity of offshore treasury bonds will likely boost demand and restore some market confidence on the finance ministry's commitment in the development of the dim sum market," said the bank.

The finance ministry also released a plan of $3 billion worth of sovereign bonds in the second half this year, without disclosing any further details.

It will be the second auction of US dollar-denominated sovereign bonds within nine months after the $2 billion issuance in late October, the first sale of this bond since 2004.

Half of the dollar-denominated sovereign bonds were designed with a five-year maturity, priced to yield 2.196 percent, or just 0.15 percentage points over comparable US Treasury notes. And the other half were 10-year bonds priced to yield 2.687 percent, or 0.25 percentage points above Treasury yields. All of the $2 billion had no rating.