Chinese companies continue to look to offshore corporate debt markets
China’s offshore bond issuance declined 22 per cent in the first-half on year to US$53.5 billion
In the wake of the Brexit turmoil, mainland Chinese companies say they have no plans to roll back overseas bond issuance, as global investors remain upbeat towards Chinese corporate debt even as the yuan has lost ground against the US dollar recently.
“I don’t see Brexit has had a big impact; in fact, China’s corporates could be beneficiaries because overseas investors are now turning to China debt, thinking it more secure and stable, compared to Europe,” said Paul Au, head of debt syndicate and co-head of DCM, Asia, at UBS.
Still, there has been some negative impact, as Chinese companies face higher costs when issuing dollar-denominated corporate bonds in the offshore market, however some of these costs are offset by the willingness of investors to accept lower yields.
The yuan has lost about 1.3 per cent against the US dollar since the Brexit result on June 24.
Some mainland companies said conditions in the offshore debt market have held up pretty well considering the uncertainties over the future relationship between Britain and Europe.
“Our offshore debt price has improved in the secondary market [after Brexit],” said Kenny Chan, executive director at Future Land Development.
The Shanghai home builder has issued two tranches of dollar bonds totalling US$600 million, maturing in 2017 and 2019 respectively.
Chan said he would continue to monitor the market, adding that investors appear to prefer buying emerging market high yield bonds rather than euro zone bonds after the Brexit decision.
An unexpected 5 per cent drop in the yuan last year resulted in huge foreign exchange losses for Chinese firms with heavy exposure to bonds denominated in US dollars, prompting many companies to return to the mainland domestic bond market.
As a result, China’s offshore bond issuance declined 22 per cent on year to US$53.5 billion in the first six months this year, the lowest first half since 2013, according to Dealogic data.
In some instances, Chinese homebuilders, one of the most active issuers in the offshore debt market, are able to tap the overseas debt market at a lower cost than the domestic mainland market as authorities seek to put the brakes on credit.
“The funding cost is rising in the mainland but falling in Hong Kong,” said Tony Chen, credit analyst at Nomura Holdings in Hong Kong.
He added that overseas investors were keen on bonds issued by property developers as they see the sector as solid in the long term.
Meanwhile, Beijing is tightening domestic credit because of the increase in corporate default cases.
Some analysts said Chinese companies’ offshore debt issuance was likely to improve in the coming quarters.
“The offshore market is recovering in the second quarter from the first quarter,” UBS’s Au said. “And the trend will continue.”