Capital curbs push Chinese firms towards risky, costly dollar bonds

China’s efforts to support its currency and cool its hot property market are encouraging more Chinese companies, including many state firms, to take on extra cost and risk by raising foreign-currency bonds in Hong Kong and other offshore locations.

Despite the yuan’s nearly 7 per cent slump against the dollar in 2016, Chinese companies including state-owned Bank of China raised a record US$111 billion in offshore dollar bonds, according to data from Dealogic, up from US$88 billion in 2015.

JPMorgan analysts, using their own dataset, are forecasting another rise this year, even though many economists expect the yuan to fall further, making the loans more expensive to service and repay.

The list includes issuers who need dollars to pay for overseas acquisitions and deals but are unable to use their yuan after China tightened its grip on capital outflows last year to support the currency.

“It’s getting increasingly difficult to move money out,” said Shen Weizheng, fund manager at Ivy Capital, which invests in stocks and bonds in Hong Kong. “So for Chinese companies eager to invest overseas, the dollar bond market becomes an easier funding avenue.”

State firms are also doing so because the government has made it easier for them to tap offshore markets, and there is pressure on them to bring more dollars onshore, investment bankers said.

Some property firms have also been left with little choice but to raise money offshore as government measures to contain a property bubble have included lending restrictions onshore.

Both the Shanghai and Shenzhen stock exchanges have tightened bond issuance rules for real estate firms since October, and regulators have repeatedly urged Chinese lenders to restrict property lending.

Chinese property developers have US$7.9 billion in loans falling due in 2017, according to Thomson Reuters data, which could push more into offshore markets if they need refinancing.

On top of the exchange risks, the borrowers also have to swallow much higher borrowing costs.

China Evergrande Group pays a 7 per cent yield on its dollar bonds in Hong Kong, but just 3 per cent in China, while China Aoyuan Property Group raised US$250 million through three-year bonds in early January, paying 6.35 per cent, almost double the average yield on yuan bonds onshore.

Despite the cost, more issuers are lining up for after the Lunar New Year in late January.

A fund manager at Invesco Asset Management in Hong Kong said his firm had signed confidential agreements with 10 Chinese issuers to become their cornerstone investor.

An underwriter who helps Chinese firms issue dollar bonds said state-owned enterprises (SOEs) were keen to issue dollar bonds partly because “the central government is encouraging them to bring dollars back to China, and SOEs are not very sensitive to borrowing costs”.

The government has fast-tracked approvals for bringing dollar bond proceeds back onshore for several state firms, in a bid to ease depreciation pressure on the yuan and slow the pace at which the country was burning through currency reserves.

Previously, all SOEs needed to register their offshore debt issuance plans with China’s central planning agency, but last year it allowed 21 SOEs to proceed without registration.

China’s local government financing vehicles (LGFV) have also joined this growing band of bond issuers in Hong Kong.

Last January, Jiangsu NewHeadline Development, a financing vehicle of the Lianyungang municipal government in Jiangsu Province, issued US$200 million of 3-year bonds paying interest of 6.20 per cent.

NewHeadline, the first LGFV to sell offshore bonds, could have issued yuan bonds onshore paying around 5 per cent, without the risk of the exchange rate moving against them.

“I asked them: your fundamentals are not bad, so why are you willing to raise funds at a higher cost?” said a fund manager who subscribed to the bonds. “They said there was a political target to raise overseas money.”

A NewHeadline official told Reuters the purpose was to “boost our overseas branding, so that more foreign investors know us”. She didn’t say why the company, which is mainly involved in infrastructure and water treatment in China, wanted overseas branding.

A stream of LGFVs followed in NewHeadline’s footsteps, and the company is mulling a second offshore bond this year.

The attractive yields, combined with investors’ expectations of a rising dollar, led to an increasing number of funds targeting dollar bonds in China last year.

That fuelled a fivefold increase in the outbound funds held in a scheme set up a decade ago to let domestic investors invest overseas, even as Beijing has suspended approvals for new quota for the scheme as part of its capital curbs.

Quota holders can now rent out their quota for twice the price they could last year, such is the demand.