May 03, 2017 07:40 PM

State Entities Become New Darlings of Dollar-Denominated Bonds

(Beijing) — Overseas bond markets have become increasingly popular sources of U.S. dollars for Chinese companies.

Tapping debts markets such as those in Hong Kong and Europe for a combined $58.6 billion in the first quarter were companies that included Lenovo Group Ltd.

Government policy adjustments and tightening liquidity have encouraged borrowers to issue dollar-denominated bonds overseas rather than raise yuan on China’s domestic bond market.

Meanwhile, Chinese investors, including state banks with dollar assets and other financial institutions, have become enthusiastic buyers of their compatriots’ bonds.

“Subdued expectations of yuan depreciation, a stable exchange rate, as well as government support encouraged bond issuance overseas,” said Ivan Chung, a senior vice president and head of Greater China Credit Research and Analysis at Moody’s Investors Service.

Another contributing factor was that “the supply of funds tightened on the domestic bond market,” he said.

Overseas bond issues accounted for 38.5% of all bond funds raised by Chinese firms at home and abroad in the first quarter, according to Dealogic, a financial data provider. That was 4.55 times the value of all bonds issued by Chinese borrowers in the same period in 2016.

Chinese activity on overseas bond markets is expected to grow in the coming months. A recent report by financial services firm JP Morgan Chase & Co. estimated the value of all dollar-denominated bonds issued by Chinese companies could reach $101 billion by the end of 2017, accounting for more than half of Asia’s outstanding dollar-denominated bonds.

Triggering the shift was a June 2016 decision by the State Administration of Foreign Exchange (SAFE) that let all China-based corporate entities except for financial institutions to start repatriating money raised by issuing bonds abroad. SAFE’s decision gave borrowers permission to bring U.S. dollars into China for conversion into yuan.

Under a previous policy, only Chinese enterprises with foreign investors could obtain yuan by exchanging foreign currencies raised overseas.

Another overseas bond-friendly development came in February, when the National Development and Reform Commission (NDRC), China’s top economic planner, gave electronics and smartphone giant Huawei Technologies Co. Ltd. as well as 10 state-owned financial institutions the green light to issue dollar-denominated paper through a pilot program.

The NDRC program includes a quota system through which borrowers can independently decide when and how many bonds to issue overseas.

The program’s initial participants included the Industrial and Commercial Bank of China, the Agricultural Bank of China, China Life Insurance Co. Ltd. and China Huarong Asset Management Co. Ltd. In April, the list expanded to include China Petroleum & Chemical Corp., also known as Sinopec, and China Minsheng Bank Co. Ltd.

Investors Knocking

In addition to government policy support, the quest to borrow dollars through overseas bond markets has been backed by Chinese investors, including financial institutions.

A flurry of Chinese investors chasing high-yield bonds overseas over the past year has helped narrow the yield gap between speculative- and investment-grade credit, according to a recent report by S&P Global Ratings. Key factors are inexpensive dollar funding and carry trades that involve borrowing money at low rates while investing in high-yield assets.

“Chinese companies and financial institutions created a funding chain,” said Liao Qiang, a credit analyst with S&P. Links in the chain include Chinese banks and their clients with healthy stockpiles of U.S. dollars.

Non-Chinese investors have been generally cool toward Chinese bonds issued outside China on the grounds they provide insufficient financial disclosure and because yields are not considered in line with borrower credit ratings.

Chinese banks playing the offshore bond market prefer paper issued by Chinese companies and institutions with high credit ratings, such as state-owned asset management companies. Recent government decisions have given these creditworthy entities the power to use proceeds from bond issues to buy high-yield U.S. dollar bonds overseas.

Offshore bond investors have focused on borrowers with relatively low credit ratings, such as property developers that since last year have been pressured by government price controls that make it harder for potential homebuyers to obtain financing. As a result, investors drove up the price of speculative-grade bonds , and less-creditworthy bond issuers have reaped more funding, said Christopher Lee, a credit analyst at Standard & Poor’s.

“We believe this is mainly caused by sufficient market liquidity, a trend that has been out of line with creditworthiness,” Lee said.

Some investors as a result have raised questions about the value of China’s bond rating system. But in fact, according to a fund manager for a Chinese institution that invests in overseas securities, Chinese institutional investors rely on their own respective internal credit rating systems, which they consider more reliable than any system used by a multinational ratings agency.

Most U.S. dollars parked in Chinese banks are tied to individual and business customers’ accounts. According to the S&P report, more such account holders bought and deposited dollars over the past few years to hedge against yuan depreciation risks.

In recent years, though, falling demand for U.S. dollar loans in China resulted in a greenback glut, the report said. The glut motivated banks to purchase bonds sold by state-owned issuers, including asset management companies, which used the proceeds to chase high-yield bonds on overseas markets.

Huarong raised about $2.6 billion overseas in January. Issues included $1.1 billion worth of three-year bonds with a 3.375% coupon rate, and perpetual bonds worth $1.5 billion and a coupon rate of 4.5%.

Huarong raised another $2.97 billion on April 21 by issuing bonds in the Hong Kong bond market.

In addition to Huarong, the government’s asset management firms China Cinda Asset Management Co., Ltd., China Orient Asset Management Co. Ltd. and China Great Wall Asset Management Co. Ltd. are among China’s most active issuers of dollar-denominated bonds, according to the S&P report. These firms were formed around the turn of the century to dispose of bad debt held by state banks.

Because toxic debt managers enjoy high credit ratings, S&P said, even their low-yield bonds have been attracting investor attention.

The S&P report predicted Chinese investors would continue chasing high-yield bonds abroad as long as they can access inexpensive dollars.

Contact reporter Dong Tongjian (

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