China Mobile Why Did China Case Study

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China Mobile's $12 - $15 billion bond offering was divded into multiple traunches and sold in multiple markets across the world. A majority of the bonds were sold in the U.S. But given the size of the offering the company would not have been able to price it in Hong Kong dollars due to the exchange rate at the time. One must also examine the exchange dynamics between the Chinese Yuan and U.S. Dollar, as the Yuan continues to be artificially held at predetermined rate and not allowed to float in the public market.

Can you see any downside to China Mobile's international equity and bond issue?

The same reasons that support the company's decision to price their bond offering in U.S. Dollars can also be a downside risk. The greatest risk in the international bond markets is the exchange rates between the nation issuing the bond and the currency in which it was issued. Since the exchange rate between the Chinese Yuan and the U.S. Dollar has been artificially stabilized, the risks are minimized.

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However, if the exchange rate is released and allowed to float with other currencies, massive fluctuations in the exchange rate can lead to a significant increase in the cost of capital for China Mobile based on this bond issuance. In essence, if bond issuers and investors share the same expectations regarding future exchange rate developments, nominal interest rate differentials will offset expected exchange rate fluctuations. Such is the case if the Yuan to Dollar exchange rate remains unchanged. But if they also share a comparable degree of risk aversion, they will be similarly eager to avoid exchange-risky issues. This exchange rate risk could potentially be a downside risk for China Mobile issuing their bonds in U.S. dollars.

China Mobile Limited. (2002). China Mobile Form 20-f. Hong Kong, China: Author

Grabbe, OJ (1996), International Financial Markets, 3rd edition, Englewood Cliffs, NJ, Prentice Hall.

Campbell, JY, LM Viceira and JS White (2003): "Foreign currency for long-term investors," Economic Journal, vol 113, p C1 -- C25......

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