Why is China's first issuance of negative interest rate sovereign bonds so popular with international capital?
■ Observer
Behind the hot sales of China’s negative-interest-rate euro sovereign bonds, it reflects that international capital’s confidence in China’s economic development is increasing.
The Ministry of Finance of China announced that it had successfully issued 4 billion euros of sovereign bonds on November 18.
The 5-year 750 million euro bond has a coupon rate of 0% and a yield of -0.152%, which is the first time a negative interest rate issuance has been achieved.
This bond issuance is the second consecutive year since the Chinese government restarted the issuance of euro sovereign bonds in 2019, and has created the lowest yield of my country’s overseas sovereign bond issuance so far.
It is worth noting that this bond issuance has been actively subscribed by international investors. The order scale has reached 4.5 times the issuance volume, and the final investment ratio of European investors is as high as 72%.
Sovereign bonds are endorsed by government credit
Sovereign bonds are bonds issued by a country's government in foreign currencies on the international market.
This type of bond is called a sovereign bond because it is a bond issued by the government and endorsed by government credit.
The negative interest rate Euro sovereign bonds issued by China this time have been enthusiastically welcomed by international investors, and some may be puzzled by this.
It's like you borrow 100 yuan from someone and only pay 99 yuan when it is due.
Imagine, in this case, why is anyone willing to lend you money, or even rush to lend you?
To understand this problem, we must first understand the investment behavior of the bond market.
In the capital market, investors are regarded as rational people and profit-seeking economic people. Investment behavior is a decision made by investors after weighing various risks and pros and cons.
The reason why the world will rush to buy China's sovereign bonds with negative interest rates is naturally that China's sovereign bonds have their advantages.
Investing in Chinese sovereign bonds is a rational choice
It should be recognized that investing in Chinese sovereign bonds is a rational choice under the current background of negative interest rates.
In recent years, in response to the downward pressure on the economy, many countries have adopted loose monetary policies.
Negative interest rates are an unconventional monetary policy tool that has only emerged in recent years. At present, many countries, including Europe, have entered the era of negative interest rates.
In July 2009, Sweden took the lead in lowering its overnight deposit interest rate to -0.25%; in June 2014, the European Central Bank subsequently also lowered its deposit interest rate to -0.1%, and in September 2019 it further reduced it to -0.50%; Japan The large-scale monetary easing policy was implemented as early as the beginning of 2013, and the negative interest rate policy was introduced in early 2016.
In particular, after the new crown pneumonia epidemic has swept the world, some major developed countries represented by the United States even spared no expense in releasing their currencies, causing concerns about global liquidity and deepening the implementation of negative interest rate policies on a wider scale.
In the era of negative interest rates, it means that if investors deposit money in banks, not only will they not be able to earn interest, they will have to pay a certain "custodial fee" to the bank, and the currency will suffer the risk of depreciation.
In comparison, although China’s sovereign bonds have negative interest rates this time, they actually have a clear advantage over other euro sovereign bonds. For example, on November 18, the German 5-year government bond yield was -0.76%. Treasury bonds have higher yields.
In fact, in the bond market, most investors do not come from the interest of the bond, but more profit through market operations to obtain the price difference of bond transactions.
The market generally predicts that under the repeated impact of the epidemic, European interest rates are likely to fall further, and the degree of negative interest rates may continue to deepen.
Although the Euro sovereign bonds issued by China this time are issued at negative interest rates, they are still cost-effective in the European financial market. Moreover, the Euro sovereign bonds issued this time have higher interest rates than German, French, and Italian government bonds. If it is profitable, it is naturally attractive.
International capital casts a vote of confidence in China's development
More importantly, behind the hot sales of China's negative interest rate euro sovereign bonds, it reflects the increasing international confidence in China's economic development.
At present, China has taken the lead in basically controlling the epidemic, and the momentum of economic recovery and growth is good.
Data from the National Bureau of Statistics show that the economic growth rate in the first three quarters of this year has turned from negative to positive, and the growth rate in the third quarter has returned to 4.9%, which is better than most major economies.
Both Standard & Poor's Global Ratings and Fitch Ratings assigned an "A+" rating to the Euro sovereign bonds issued by China, which is consistent with China's "A+" sovereign rating.
In other words, China's sovereign bonds are safer for foreign investors, and the investment risk is relatively small, which will naturally cause countries to "craze".
All in all, the credit of sovereign bonds relies on national credit. International capital enthusiastically favors China's sovereign bonds, which is essentially a vote of confidence in China's economic development.
□Li Changan (Economist)