Chinese banks have been increasingly tapping the US dollar floating rate notes (FRN) market for financing amid rising US interest rate and Sino-US trade tensions. In the primary market, recent tightly priced Chinese banks FRN reflected strong investor demand towards financials in the offshore market.

On Sep 17, China Construction Bank Hong Kong Branch 3-Year US$1 billion FRN Sustainability Bond was priced at 3mL+75bps, 25bps inside the initial price guidance (IPG). The Shanghai Pudong Development Bank (SPDB) Hong Kong Branch 3-Year US$500 million FRN was priced at 3ml+84bps, 26bps inside the IPG.

"We have seen the recent market appetite moving towards floating rate notes. In the meantime, as banks borrow and lend at the same time, banks are actually facing limited risks," a debt capital markets (DCM) banker at a European bank tells The Asset. "The market demand, which has accumulated over the past few months, came out at this point," he adds.

In an internal memo seen by The Asset on September 19, IPG of China Merchants Bank (CMB) Hong Kong Branch's 3-Year US$400 million FRN was also priced 3mL+77.5bps. Given bullish investor demand towards Chinese bank FRN, it is expected that the new CMB FRN will still be attractive to offshore bond investors.

Chinese banks have played a significant distribution role in recent FRN transactions. In SPDB's FRN deal, six out of seven joint global coordinators were Chinese banks or securities houses.

In late May, Bank of China London branch priced dual tranche green bonds totaling US$1 billion in FRNs. The three-year FRN priced at par with a similar coupon and re-offer spread of 73bps over three-month Libor. This was at the tight end of the final price guidance of 75bps area (+/- 2bps) and 27bps inside of the initial guidance of 100bps area.

In addition to FRNs, Asian US dollar bond market has also seen frequent additional tier-1 (AT1) bond issuance from Chinese banks over the past two years. The AT1 bonds are seen as a tool to fulfil the regulatory requirement imposed by central bank.

Unlike Chinese bank bonds, which are often regarded as stable and reliable credit among offshore investors, other bonds from high yield issuers, such as local government financing vehicles (LGFVs), have been facing liquidity issues. On September 12, seven LGFVs were downgraded by global rating agency S&P due to changing dynamics between China's local governments and their financing vehicles.