Fears that the slow economy recovery of the Western economies will keep interest rates near record lows for quite some time is being cashed in by China.
In a bond sale that attracted significant investor interest, for the first time on Wednesday, debt at a negative interest rate was issued by the Chinese government, according to Deutsche Bank (DB), one of the lenders that aided in making arrangements for the transaction.
With European investors looking to gain exposure to the only major global economy that is expected to register a growth this year, the bulk of the debt was snapped up by the investors as they faced continued lower rates of interest at home.
5-year debt priced with a yield of minus 0.152% was included in the Chinese sale which generated final orders of about €16 billion ($18.9 billion) for the €4 billion ($4.7 billion) worth of bonds that were put on offer. 10-year and 15-year bonds with yields below 1% were also sold by China.
Global asset managers from Europe, Asia and the United States as well as central banks and sovereign wealth funds invested in the bonds. According to Deutsche Bank, about 85 per cent of the 15-year debt was accounted for by European investors in addition of about two thirds of the shorter-dated bonds.
“It shows investors are still underexposed to China and there definitely is a scarcity value perceived in these bonds,” said Deutsche Bank’s head of China onshore debt capital markets, Sam Fischer.
Compared to what is available in Europe, the opportunity to invest in debt at higher yields was lapped up by European investors. In Europe, interest rates have been slashed to record lows while also investing a trillion euros into the region’s financial markets to combat the economic hit of the pandemic. According to Refinitiv, as on Thursday, the yields on five-year German government bonds were around minus 0.75%.
According to banking sources, greater exposure to China’s economy is desired by investors as is indicated by the debt sale because the Chinese economy is recovering from the pandemic hit at much faster pace compared to Europe and the United States.
David Yim, head of capital markets for Greater China and North Asia at Standard Chartered Bank, said in a statement that the Chinese debt sale also indicates that international investors are “full of confidence in China’s strong economic rebound and its future developments despite the lingering global Covid-19 pandemic”.
On the other hand, there are concerns that economies in the United States and Europe could be pushed in a recession in the fourth quarter as mass restrictions are being imposed in these regions to prevent the spread of a second wave of the pandemic.
China’s “determination and confidence” to open up to the outside world and its efforts of integrating further with the international capital markets are demonstrated by the bond sale, said China’s Ministry of Finance in a statement posted to its website.
(Adapted from CNN.com)