Rising yields and strong dollar no deterrent to Chinese bond supply, says JPMorgan
Rising yields suggest a “correction” to historical average level, says investment bank
The US interest rate rise, a strong dollar and tighter Chinese government curbs on capital outflows are unlikely to deter Chinese companies issuing US dollar-denominated bonds next year, according to JP Morgan & Chase.
China-based companies are expected to raise US$101 billion from the offshore debt capital market, remaining the largest issuer in the Asian market and accounting for about half of total supply, according to the bank’s 2017 outlook. So far this year Chinese companies contributed 55 per cent of the US$181 billion of dollar bond issuance in Asia, excluding Japan, more than double their market
share four years ago, data compiled by Bloomberg shows.
The US Federal Reserve raised its fund rate by 25 basis points on Thursday, with expectations of the move having contributed to the yuan slumping 5.9 per cent against the dollar this year. Yield spreads on Chinese dollar-denominated bonds have widened 10 basis points from a nine-year low reached in August, according to JPMorgan Chase & Co indices. These movements have added to concern over whether China bond supply would sustain the momentum seen in 2016.
However, JPMorgan said these concerns were overdone.
“The Fed fund rate hike only increased the short-term interest rate. The longer-term rate is still dependent on Donald Trump’s fulfilment of a more proactive fiscal policy, which shapes the inflation level,” said Samantha Xie, executive director and head of debt capital markets in China at JP Morgan.
The bank noted that despite the recent rise, yields are still near historical lows. It expects the JP Morgan Asia Credit Index to widen 20 basis points to 262 by the end of 2017, while high-yield bonds are expected to widen 100 basis points to 643 basis points. This, however, suggests a “correction” to the historical average level.
“Whether this is good timing really depends on which period you compare to,” said Xie. “In 2009-10, yields for Asia’s high-rated corporate bonds stood at more than 7 per cent. Now even if the 10 year US Treasury yields rose to, say, 2.5 per cent from 2 per cent, it is still low and attractive to Asian issuers.”
Chinese issuers are further helped by sufficient liquidity and strong demand from Chinese banks’ offshore subsidiaries, which are much more willing to buy Chinese companies’ US dollar bonds compared to their non-Chinese peers. JPMorgan said the Asia market overall is much “less sensitive” to changes in positions held by global funds.
The bank estimates US$26 billion of China high-yield corporate supply next year, as more Chinese high-yield developers raise funds offshore due to tighter regulations for onshore issuance.
On whether Beijing’s recent curbs on capital outflows would undermine the ability of overseas investors to buy Chinese firms’ US dollar bonds, as Chinese investors make up a majority of the “overseas investors”, Xie said: “That will at its best raise the borrowing cost, which won’t deter Chinese issuers. The liquidity remains abundant offshore.”
JPMorgan also foresees a relatively inactive market for China based issuers in the first two months of 2017, followed by a rush in March. This is because Chinese firms have to apply for a new annual issuance quota from the regulator, which is unlikely to be granted at the start of 2017.