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October 10, 2013 6:56 am
Diversifying away from the dollar has long been a goal of the Chinese authorities, but up until a recent sell-off in dollar bonds prompted by uncertainty about US monetary policy, the euro market had been an unattractive option.
On Thursday, Sinopec raised €550m via 7-year debt, paying a coupon of 2.625 per cent. The company simultaneously sold 5-, 10-, and 30-year US dollar bonds totalling $2.75bn.
Overall, euro-denominated debt remains relatively small at around 7 per cent of the group’s $10.5bn in gross foreign currency debt.
Sinopec’s euro debt issue follows a similar bond from rival state-owned oil producer Cnooc, which late last month became the first Chinese company to borrow in euros.
The Cnooc bond, also seven years in tenor, was priced at a spread of 165 basis points over comparable Bunds – wider than Sinopec’s 158bp spread – suggesting that interest in Chinese euro bonds has already increased.
As large, government-backed, highly rated companies, Chinese oil producers have often been trailblazers in international debt markets. Cnooc and Sinopec were the first mainland companies to raise 30-year dollar debt in late 2012.
Mark Follett, head of high-grade debt for Asia ex-Japan at JPMorgan, expects more deals from mainland borrowers to come.
“As follow-on issuers come to the market, Chinese euro currency bonds will become an asset class in themselves. This will make some European investors, who are currently not involved, start focusing on this sector of the market.”
In addition to offering a fresh source of funding for Chinese companies looking to move away from the dollar, the opening of the euro market also presents a new financing option for those hoping to invest overseas.
State-backed energy and mining companies in particular have been aggressive in seeking acquisitions, as part of Beijing’s broader strategy to secure natural resources around the world.
Since the start of 2011, Chinese oil and gas companies have spent $75bn on overseas deals, making up more than 40 per cent of China’s total outbound mergers and acquisitions activity, according to Dealogic.
Euro bonds have been growing in popularity among non-European borrowers in recent weeks due to increasingly attractive pricing. Expectations that the US Federal Reserve might soon scale back its asset purchases drove a sell-off in global fixed income over the summer, pushing up yields on dollar debt. Bond yields move inversely to prices.
However, better economic news in Europe has helped to keep down yields on euro debt.
Year-to-date, non-European issuers have raised more than €50bn through euro-denominated bonds, roughly the same as the previous two full years combined, according to Dealogic.
The successful deals from the two Chinese companies also point to growing willingness among European investors to increase their exposure to China. Economic data have shown a pick-up in activity, soothing fears that the world’s second-largest economy was heading for a damaging slowdown.
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