Chinese Issuers Feel Chill in Offshore Bond Market
Sales of China’s dollar-denominated corporate bonds in July declined to the lowest level in two years amid mounting default concerns and tightening regulatory approvals for bond sales.
Chinese non-financial issuers sold a total of $2.9 billion of offshore bonds in July, the lowest monthly sales since August 2016 and less than one-fifth of the level in July 2017, data from Bloomberg showed.
Chinese companies’ total offshore bond sales, including financial issuers, also declined. Chinese companies sold a total of $44.5 billion of dollar-denominated bonds in the second quarter, down 20% from the same period in 2017, data from United Credit Ratings Co. showed.
The sharp drop came after Chinese companies rushed to sell bonds offshore since last year as domestic regulators’ deleveraging campaign drove up financing costs at home. Chinese offshore corporate bond sales reached as high as $17.3 billion in March but started to decline in the second quarter and went into a nosedive since June.
More than one-third of the offshore bond issuers in the second quarter were property developers, which have suffered narrowing access to financing in the domestic capital market due to regulatory controls to cool down the overheated sector. The decline in developers’ offshore bond sales was not as significant as for other sectors, but some issuers sold their bonds at a coupon rate of more than 10%, nearly double the average rate.
Several credit rating firms attributed the decline in offshore corporate bonds to tightening regulatory approvals for cross-border borrowing due to concerns about the build-up of companies’ overseas debt.
The National Development and Reform Commission (NDRC), China's top economic planner, has tightened scrutiny of offshore credit issuance since April to rein in debt growth, according to Lan Ying, the head of debt capital markets of Ping An Bank’s Shanghai Free Trade Zone Branch.
But bonds maturing in a year or less do not need approval by the NDRC, which has pushed many Chinese developers to sell short-term bonds in overseas markets since late May to bypass the offshore issuance quota.
In late June, the NDRC and the Ministry of Finance issued a joint notice highlighting risks of the overseas bond market and limiting the use of proceeds from offshore bonds sold by developers to repaying existing debt instead of investing in domestic property projects and replenishing working capital.
Rising defaults on domestic corporate debts are also raising fears that onshore risks might spread into the offshore bond market, Lan said.
Wayne Lai, Fitch Ratings’ associate director of corporate ratings, said global investors are more risk-averse with rising risks in emerging markets and escalating trade disputes.
Lai added that the recent sharp depreciation of the yuan has increased Chinese issuers’ burden to repay dollar-denominated bonds.
Even though defaults on Chinese offshore corporate bonds are rare so far, a recent default by an oil and gas producer sparked fears of further defaults on offshore bonds.
China Energy Reserve missed repayment of three-year dollar bonds that matured May 11. Although the company paid interest to bondholders in following weeks, it announced a default on the $350 million principal on May 25 in a regulatory filing in Hong Kong, citing a “liquidity crunch.”
But China’s recent easing signs are expected to restore overseas investors’ confidence in Chinese offshore corporate bonds.
In a meeting last month, the State Council, China’s cabinet, pledged proactive fiscal policies that include boosting infrastructure investment and lending to companies.
The People’s Bank of China also recently loaned 502 billion yuan to financial institutions via its one-year medium-term lending facility to increase loans to companies.
The supportive policies have been reflected in the prices of Chinese offshore corporate bonds. The spread between the yields of Chinese offshore corporate bonds and U.S. Treasury bonds has been shrinking since mid-July.
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