China is moving forward with plans to issue its first sovereignbonds in dollars since 2004 in a deal that will put a symbolic sealof approval on the booming offshore Asian debt market.

The Ministry of Finance was scheduled to meet with bankers inBeijing Wednesday to discuss the sale, according to people familiarwith the plans. The deal is aimed for as soon as this month,according to the people, who asked not to be named as the specificsaren't public. The MOF said in a statement it will sell $2 billionworth of notes.

While China's government doesn't need to borrow offshore, with adomestic debt market that's now the world's third-largest, itsbonds will provide a new benchmark for pricing the country'sstate-owned enterprises. A successful deal will pull down thoseborrowing costs, and may fuel further sales after what's beenrecord issuance so far this year.

China's investors have been eager to snap up dollar securities,and with the country's borrowers obliging, the Asian dollar-bondmarket is effectively being transformed into a Chinese operation.Within as few as three years, some 80% of the Asian market outsideJapan is likely to be Chinese, according to Goldman Sachs AssetManagement. By then, its size will have surpassed $1 trillion,strategists predict.

News on the plans comes little more than a week before a pivotalCommunist Party leadership gathering, and underlines thegovernment's confidence there will be strong demand despite China'stwo sovereign-rating downgrades this year. S&P Global Ratingscut China's credit rating by one notch, following on from Moody'sInvestors Service, which did the same thing in May.

“It will certainly have scarcity value and I imagine it will besnapped up pretty quickly,” Geoff Lewis, Hong Kong-based seniorstrategist for Asia at Manulife Asset Management, said of China'ssovereign bonds in an interview with Bloomberg Television. “It's aclear sign of China's determination to move into the internationalfinancial markets” and play a role “commensurate with the size ofits economy.”

China's MOF said Wednesday that it will sell $1 billion offive-year notes and the same amount of 10-year debt “soon.” MostAsian dollar bonds nowadays are sold outside the U.S. and Chinahasn't specified which rules will govern its sovereign issue,though the MOF did say the bonds will be listed on the Hong KongStock Exchange.

When Postal Savings Bank of China Co. sold $7.25 billion worthof dollar debt last month, only 3% went to non-Asians. That dealwas the biggest since a jumbo sale by Alibaba Group Holding Ltd. in2014.

Korea Comparison

Anticipation of strong appetite for China's new issue hadalready started reducing the premiums for Chinese issuers,strategists said last month. As for the sovereign bonds themselves,South Korea's offshore government debt is a key point ofcomparison, and tighter pricing than its Asian neighbor'ssecurities would be a further feather in China's cap.

South Korean dollar bonds due in September 2023, currently theclosest to a five-year note, yield about 84 basis points over U.S.Treasuries, according to data compiled by Bloomberg. The country,which has a rating two steps above China's, has notes due inJanuary 2027 that trade 78 basis points over comparableTreasuries.

“We expect the small $2 billion issuance of five-year and10-year China sovereign issuance will quickly become a collector'sitem, with a flat curve,” said Owen Gallimore, Singapore-based headof credit strategy at Australia & New Zealand Banking GroupLtd. “Initially the market will price at a discount tointra-regional peers such as Korea.”

While both Moody's and S&P flagged concerns over China'scontinuing buildup of debt in their sovereign downgrades this year,there's been little impact on the bond market. Most of the debt isat the corporate and local-authority level, and both haveparticipated in the record dollar issuance this year. Junk-ratedproperty developers have been another notable source of supply.

With the growth of the Chinese offshore bond market, thecountry's lenders have become increasingly competitive in theunderwriting leagues. Six of the 10 banks represented at theBeijing meeting Wednesday on the sovereign sale were Chinese,according to people familiar with the discussions. Citigroup,Deutsche Bank, HSBC Holdings and Standard Chartered were the fourinternational firms represented, according to the people.

Agricultural Bank of China, Bank of China, Bank ofCommunications Co, China Construction Bank Corp., Industrial &Commercial Bank of China — all state-owned lenders — and ChinaInternational Capital Corp. were the six Chinese groups at thegathering, the people said.

From: Bloomberg News

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