China’s capital controls may rattle Asia’s dollar debt market

Asia’s dollar bond market could be one of the biggest casualties of China’s crackdown on cash leaving the country.

Hemmed in by stringent curbs on borrowing at home and on overseas dealmaking, Chinese companies will be forced further into the offshore debt market to fund the more than US$200 billion in acquisitions announced this year, according to Standard Chartered Plc. That could mean an explosion in supply for a market already facing risks from a rising dollar.

At the same time, Chinese dollar-denominated debt sales are increasingly targeting Chinese investors diversifying from the yuan -- and they’re now subject to the same restrictions on moving money abroad as the companies.

“It’s said to have become very difficult to send onshore funding offshore,” said Chao Li, head of Standard Chartered’s Greater China bond syndicate in Hong Kong. “There would be natural pressure for Asian dollar bond yields to go up because of the increase in supply, especially for Chinese high-yield names, which have received good support from Chinese investors.”

Chinese authorities are bolstering their efforts when it comes to stemming capital outflows as the Federal Reserve’s tightening bias spurs yuan losses.