SOE dollar bond sales soar to record US$18.7b in second quarter

Total is highest since 2014, as yuan continues to devaluate and government moves to curb capital outflow

PUBLISHED : Monday, 25 July, 2016, 8:36pm
UPDATED : Monday, 25 July, 2016, 10:31pm

State-owned enterprises (SOEs) have raised the biggest volume of US dollar bonds in the second quarter since 2014, against the backdrop of a continued devaluation of the yuan, and China’s top-down efforts to curb capital outflow.

Sales of dollar bonds by some of the country’s largest biggest SOEs rose to a record US$18.7 billion in the April-June period, 80 per cent higher than the average in the previous four quarters.

In comparison, overall issuance by Chinese companies shrank 11 per cent as a weakening yuan drove up the cost of servicing overseas debt, Bloomberg reported.

Iris Pang, a senior economist with Natixis Hong Kong, said the difference in appetite of SOEs and private companies for funds from the US shows the former may have become an illustration of how the central government wants to absorb US dollars, and to replenish China’s shrinking foreign reserve pool as capital outflow intensifies.

Li Yimin, an economist with Shanghai based Shenwan Hongyuan Securities said: “Everyone knows that at a time when the US dollar is strengthening and interest rates are rising, raising dollar denominated bonds is becoming more expansive, particularly for SOEs who usually enjoy favourable and cheap credit in China.”

Since late last year, a rising number of companies, particularly property developers who used to rely heavily on funding from the US, have been paying back their dollar bonds in advance to save costs.

Li added historically, the second quarter would witness higher issuance of dollar bonds.

“It would be very hard to prove the US dollars the SOEs raised overseas are or will be repatriated to China.

“But economically, for companies focused on domestic development, it makes no sense to raise dollar bonds now,” he said.

The yuan has declined 3 per cent against the US dollar in the second quarter, the most on record, continuing a devaluation trend, despite the country’s senior officials reiterated there was no basis for a continued depreciation of the currency.

Meanwhile, an estimate by Goldman Sachs showed a significant pickup in FX outflows to US$49 billion in June, up from US$25 billion in May, suggesting the weakening yuan during May and June may have affected sentiment.

In early June, China’s top economic planner, the National Development and Reform Commission (NDRC) allowed 21 companies — including the nation’s biggest banks — to sell foreign-currency debt without having to first seek approval.

The government is encouraging companies to bring the proceeds onshore to convert into yuan, the NDRC said.

The NDRC also encouraged local companies in China’s four free-trade zones (FTZ) — rather than their overseas units — to issue bonds.

According to China’s administrative rules, companies registered in the FTZs should repatriate funds raised overseas to China.

China Development Bank Corp, one of the 21 firms included in the pilot programme, will hold investor meetings for dollar bond issuance on Tuesday, mainland media reported.

Official numbers shows China’s foreign-exchange reserves unexpectedly increased by US$13 billion to $3.21 trillion in June, as haven assets such as the Japanese yen appreciated amid the UK’s decision to leave the European Union.