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Summer Zhen

Chinese developers’ shift in focus from the offshore to the onshore bond market will accelerate this year due to robust domestic liquidity and in anticipation of the yuan’s depreciation, experts say.
Hong Kong-listed mainland developers signalled a return to issuing bonds in the domestic market last year and this resulted in a rapid decline in offshore bond sales.
The offshore new bond issuance volume dropped 50 per cent to US$12.3 billion in the first 11 months of 2015, data from researcher Dealogic shows, while onshore issuance surged 43 per cent to US$62.4 billion.
As part of efforts to boost property investment, Chinese authorities started to reopen the domestic bond market to developers at the end of 2014.
Under the new rules, developers can issue corporate bonds that are worth no more than 40 per cent of their net asset value through the China Securities Regulatory Commission.
Alternatively, they can sell bonds in private placements through the stock exchanges, which will grant a quota to a developer based on the firm’s domestic ratings.
Analysts said most developers did not begin issuing domestic bonds until the second half of last year.
Tony Chen, a property credit analyst at Nomura International (Hong Kong), said few developers had used up their quotas, especially through private placements, and there would be room for them to further borrow money through domestic channels this year. And the funding costs are low.
Mainland Chinese developers have been struggling to cut financing costs as land prices have surged in recent years. One way to achieve this is through cheap domestic funding, which has helped the companies trim those costs.
As an example, Country Garden Holdings, one of the largest homebuilders in China, issued a three billion yuan domestic corporate bond with a coupon rate of 4.2 per cent in August, compared with its 7.5 per cent US dollar bond issued early last year.
Leading developers including China Vanke, Evergrande Real Estate and Longfor Properties have also enjoyed paying coupons in the domestic market that are nearly half those on their offshore dollar bonds in the past year.
The trend has lured more Hong Kong-listed mainland developers back onshore and Jefferies data shows the sector’s average borrowing costs have declined one to two percentage points as a result.
“We want to take advantage of this window and raise more capital domestically,” said Ryan Hui, chief financial officer of medium-sized developer Yuzhou Properties, which issued two domestic bonds last year.
“The possible yuan depreciation will push the cost of offshore dollar bonds higher,” Hui added.
He said domestic liquidity remained more than sufficient as market demand for high-grade credit bonds was strong.
Global ratings agency Standard & Poor’s expects the domestic bond market will remain open this year as the industry is still on the way to recovery.
Offshore investors have tried to offer low rates to lure developers back but analysts said the market would likely keep shrinking this year.
Shanghai-based developer Future Land Development Holdings placed a 6.25 per cent US$250 million senior note in November, saving four percentage points from its previous offshore borrowing. Other developers have since also issued their cheapest-ever offshore bonds in the following month.
Chen said it was unlikely the rate of offshore property bonds would be lowered further in the market.
“The offshore bond market will shrink further,” Chen said. “Developers may only use offshore channels for refinancing of existing debts.”
Despite the quick move back to the mainland bond market, Hong Kong-listed developers are aware of the potential policy risks involved and stressed that they would maintain a good relationship with overseas investors to hedge those risks.
“It is not good to just appear when you need money,” said Kenny Chan, executive director of Future Land.


Chinese developers to increasingly tap onshore bonds

Picture shows the new 100RMB notes to be released at the Bank of China in Central. 12NOV15

A customer holds a 100 Yuan note at a market in Beijing, China as developers continue to tap the onshore bond market. Photo: Reuters

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New | Chinese developers to increasingly tap onshore bonds