China issues dollar bonds in Saudi Arabia with yields nearly matching those of U.S. Treasuries

China recently revealed its plans to support its struggling economy, receiving an overwhelming $40 billion in demand for its first dollar-denominated bond issuance since 2021.

This remarkable level of interest, which is 20 times the bond volume offered, allowed China to reduce the yields it will pay on these bonds, bringing them close to those of equivalent U.S. Treasury bonds—with just a one-basis-point differential, according to Bloomberg.

The issuance raised $2 billion through three- and five-year bonds with spreads of one and three basis points over Treasuries, according to an insider.

Initially, the bonds were marketed at around 25 and 30 basis points above Treasury rates, but the high demand allowed for a considerable narrowing of the spread.

Although available to global investors, China made a strategic choice to offer these bonds in Saudi Arabia, an unconventional venue for such transactions, which are typically held in financial hubs like London, New York, or Hong Kong.

This move follows efforts to strengthen Sino-Saudi economic ties, highlighted by a high-level meeting earlier this year. This collaboration has led to increased Chinese investment in Saudi Arabia, including a significant boost in contributions from China’s largest steel company, according to Bloomberg.

The bonds are set to be listed on both Nasdaq Dubai and the Hong Kong Stock Exchange, enhancing accessibility for a broad spectrum of investors.

Interestingly, yields on some of China’s previously issued dollar bonds have fallen below those of comparable U.S. Treasuries—an uncommon event in global fixed-income markets, where U.S. Treasuries are historically seen as the safest investment option.

China’s dollar bonds maturing in November 2027 have sustained a “negative spread” relative to U.S. Treasuries for most of this year, with yields about 18 basis points lower than those on equivalent U.S. government bonds as of Wednesday, according to Bloomberg data.

This trend reflects strong demand from Chinese investors seeking higher yields in international markets, supported by tax exemptions for those investing in Chinese government debt.

In September, China also issued €2 billion ($2.1 billion) in bonds in Paris, marking its first euro bond issuance in three years. Meanwhile, China’s Ministry of Finance recently announced a $1.4 trillion relief package for debt-laden local governments, although it has refrained from broader stimulus measures to drive domestic demand.

The issuance was coordinated by a consortium of prominent banks, including Bank of China, Bank of Communications, Agricultural Bank of China, BofA Securities, China Construction Bank, China International Capital Corporation, Citigroup, Crédit Agricole CIB, Deutsche Bank, First Abu Dhabi Bank, Goldman Sachs (Asia), HSBC, Industrial and Commercial Bank of China, JPMorgan, Mizuho, and Standard Chartered.