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Thursday, October 23, 2003

Chinese Government Debt Upgrade

This is a very curious one. According to one widely held theory, the Chinese financial system is supposed to be near to collapse, with bad debt and non-performing loans rife accross the board. This news seems to offer another picture, with rating agencies upgrading, and investors comfortable with Chinese government debt. Undoutedly somewhere in the middle lies the truth.

China made a spectacular return to the international bond markets on Wednesday with a combination $1.5bn dollar and euro-denominated issue at prices very close to those achieved by western government agencies. The strength of the country's foreign currency reserves means that China has no need for the extra funding, but the response to the issue demonstrates investors' appetite for Chinese debt. The issue of a "benchmark" government bond will also make it easier for Chinese companies to tap the global bond markets.

The issue came shortly after Moody's Investors Service, one of the top three rating agencies, boosted China's sovereign rating one notch from A3 to A2.

The 10-year $1bn dollar portion was offered at 53 basis points over US treasuries and the five-year E400m euro tranche at seven basis points above Euribor, the rate at which European banks lend to each other. The market had expected yields to be two and three basis points higher respectively. The spread is the lowest-ever for an Asian issuer apart from Japan, with the dollar tranche priced roughly at the same level as that of US agencies, which have an implicit government guarantee. Fannie Mae and Freddie Mac, the two federal agencies that fund US mortgages, were trading yesterday at 48 basis points and 53.25 basis points over US Treasuries.
Source: Financial Times

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