Fitch Unheeded as CNPC Wins Record-Low Dollar Cost

China's largest oil company raised dollars at the lowest-ever cost for an issuer from the nation in a sign of investor confidence on the same day Fitch Ratings Ltd. cut the sovereign credit rating.

China National Petroleum Corp. sold $2 billion of notes on April 9 in three tranches that each had record-low coupons, according to data compiled by Bloomberg. The state-owned energy producer paid 3.4 percent on its 10-year notes, below the 4.18 percent average yield for energy companies in all emerging markets, according to Bank of America Merrill Lynch indexes.

The yuan climbed to a 19-year high yesterday, 10-year yuan government bond yields fell to a six-month low and China's bond risk fell for a third day on signs Premier Li Keqiang is gaining control over the overall economy and addressing local-government debt. Fitch's decision to lower the local-currency debt rating to match the international rank of A+ wasn't based on any new information, according to Western Asset Management.

"We are aware there are structural issues in China that need to be fixed," Chia-liang Lian, Singapore-based head of investment management for Asia excluding Japan at the money manager, which oversaw $462 billion of assets on Dec. 31, said in Hong Kong yesterday. "I feel comfort that there is a high degree of pragmatism and ability to understand how the market works and what should be done and what should not be done for the Chinese economy for the longer term."

Record Coupons
CNPC sold $750 million of three-year notes at a 1.45 percent coupon, $500 million five-year securities at 1.95 percent and $750 million of 10-year bonds at 3.4 percent, according to data compiled by Bloomberg. The sale is the largest by a company in Asia outside of Japan this year, the data show.

Fitch rated the long-term foreign-currency debt of the oil producer at A+, the same grade that it assigns to the government's international notes. The company had total debt of 505.3 billion yuan ($81.5 billion) as of the end of 2011, compared with revenue of 2.1 trillion yuan, according to Bloomberg-compiled data.

"It's probably the best proxy out there for the Chinese government," said James Hubbard, head of Asia oil and gas research at Macquarie Group. "They're never going to let it enter any kind of financial distress. The leadership views keeping control of the oil industry as a vitally important part of China's security."

China, the world's largest energy consumer, is promoting a "going out" policy to encourage its companies to invest and secure energy supplies abroad, as they build businesses that can compete with global rivals.

Economic Growth
The world's second-biggest economy is forecast to expand 8.1 percent this year, up from 7.8 percent in 2012, according to the median estimate of 52 economists surveyed by Bloomberg. That compares with 1.9 percent for the U.S. and 2.35 percent for nations globally. Inflation eased to 2.1 percent in March from a year earlier, compared with 3.2 percent in February.

The yuan climbed yesterday to 6.1923 per dollar, the strongest level since the government unified official and market rates at the end of 1993. It was at 6.1967 per dollar as of 10:09 a.m. in Shanghai today, prices from the China Foreign Exchange Trade System show.

Yields on China's benchmark 10-year government bonds fell 1 basis point to a six-month low at 3.47 percent yesterday.

The cost of insuring China's debt against non-payment with credit-default swaps fell 2 basis points to 69.5 basis points yesterday, according to data provider CMA.

Bond Returns
CNPC's success in the international bond market comes as the nation's dollar-denominated notes have returned 12.4 percent in the past year, as near-zero policy interest rates in the U.S., Europe and Japan encourage investors to lock in higher- yielding investments in emerging markets. The returns compare with 12.8 percent for securities in India, 7.9 percent for debt in Indonesia and 9.3 percent for bonds in the currency sold in the region as a whole, the data show.

Some investors have taken a more cautious view of local- government debt in China. Fitch cited rising risks related to the lack of transparency in the increased borrowing of localities, in an e-mailed statement on April 9. It estimates total credit in China's economy, including various forms of so- called shadow banking, may have reached 198 percent of gross domestic product at the end of 2012, up from 125 percent four years earlier.

Local Debt
"More attention should be paid to the pace of credit expansion through other channels, which is already alarmingly high," Wang Qinwei, an economist at Capital Economics, wrote in a note. "This concern was reflected in Tuesday's move by Fitch."

Financing vehicles for the localities, which have invested in roads, sewage works and ports, face greater risk of default, Moody's Investors Service said in March. The nation is still dealing with the fallout from 17.6 trillion yuan of stimulus that was plowed into the economy between 2009 and 2010 to insulate it from the global financial crisis. Former Finance Minister Xiang Huaicheng said on April 6 that local governments in the country may have 20 trillion yuan of debt, almost double an official audit figure.

China's banking regulator has told lenders to limit investments of client funds in debt that isn't publicly traded and to isolate such risks from their operations. Such investments can't exceed 35 percent of all funds raised from the sale of wealth management products, or 4 percent of the lender's total assets at the end of the previous year, the China Banking Regulatory Commission said.

Muted Reaction
The reaction to Fitch's move, which highlighted these concerns, was limited in domestic markets because local participants "still see China as a safe asset," said David Lai, investment director at Eastspring Investments, the Asia management arm of Prudential Plc, which managed $94.4 billion as of Dec. 31, 2012. It was also muted in international markets because "China's external debt position is pretty comfortable," he said.

Fitch cited China's foreign reserves, more than $3.3 trillion at the end of last year compared with sovereign foreign currency-denominated debt of $34 billion, as a supportive factor for its credit rating.

The day after Fitch's announcement, China State Grid Corp., the nation's largest electricity distributor, said it would sell 10 billion yuan of one-year bonds on April 17, according to a statement posted on the Shanghai Clearing House website.

Texhong Textile Group Ltd. (2678), the Shanghai-based fabric producer, is planning a dollar offering, according to a company statement on the Hong Kong stock exchange on April 5.

Global investors are using inexpensive funds at home, as central banks pump money into the financial system, to finance investments overseas that promise higher returns. Bank of Japan (8301) officials said April 4 the central bank will increase its monthly bond purchases to 7.5 trillion yen ($75 billion).

"After the BOJ announcement, demand for high-quality corporate credit has increased," said Angus Hui, a fixed-income fund manager at Schroder Investment Management Ltd. in Hong Kong. "Investment-grade bond transactions that are priced with some value on the table should attract strong appetite."