MNI: Euro Bonds Find Favour In China As Dollar Yields Rise

Chinese offshore borrowers are increasingly eyeing euro-denominated bonds as dollar yields rise on Fed tightening, market analysts said.

Some previous dollar bond issuers have turned to the euro and other currencies, according to analysts, including China International Capital Corp. Data from China Central Depository & Clearing Co. shows the yield on the 10-year China euro bond rated A+ is 2.19% at present, compared with 3.98% of its dollar counterpart and 3.58% of the domestic company bond with a AAA rating.

According to Wind, a Chinese financial data provider, Chinese companies have issued a total of EUR4.95 billion of euro debt so far this year, a record since regulators in 2015 called for diversified foreign debt issuance and compared with EUR2.97 billion in first half of 2021. Chinese non-financial companies issued EUR3.35 billion in debt, also a record, in the first half of this year, compared with EUR870 million in the same period last year.

LGFVs

Local government funding vehicles, or LGFVs, a major euro bond issuer among China non-financial companies, increased the issuance of the euro bonds to EUR193 million in May alone, compared with a total of EUR 227million for the first half of the year and only EUR 23million in the same period last year, according to Wind.

Dollar bonds issued by LGFVs totalled USD1.2 billion in May, sharply down from USD5.9 billion in April and USD5.1billion in March.

Analysts attributed the slowdown to regulators’ control on foreign debt raising of the sector, with reports that the National Development and Reform Commission required weak LGFVs in late-April to restrict offshore issuance. An NDRC official highlighted the management of overseas debts by developers , LGFVs and low-rated companies at a press conference in March.

DOLLAR BOND ISSUANCE SLIPS

At the same time, dollar bond issuance has dipped to USD67.1billion so far this year, the lowest since the second half of 2018. Non -financial companies issued USD42.1billion, compared with USD60.9 billion in the second half of 2021.

Net issuance of dollar bonds is expected to continue to drop on an annual basis in the second quarter as Fed hikes continue, said Ming Ming, chief analyst at CITIC Securities and a former official at the PBOC. Credit risk in property markets and tightened regulation on local government funding vehicles’ debt will also have an impact, he estimated.

The higher cost of dollar debt comes as yields on U.S. Treasuries rose above those on the equivalent Chinese bonds in April, as monetary policy in the two countries diverged, Fitch said, predicting that a weaker yuan would further dampen appetite for issuing more dollar debt via offshore capital markets.

According to Fitch Ratings, 58 out of 65 surveyed investment-grade issuers saw higher yields on their dollar bonds maturing in 2024-2025 than yields on comparable onshore bonds in early May, up sharply from only eight at end-2021.

DEVELOPERS

Net issuance of dollar bonds by Chinese property developers, hit by concerns over credit risks and the fallout from the crisis at Evergrande Group, contracted by USD7.1 billion in April, the seventh consecutive month of negative growth. The rate of return was -1.51%, compared with -3.82% in March.

The road remains bumpy. In May, Sunac China Holdings, the fourth largest developer by sales in 2021, defaulted on USD29.5 million in interest payments on a dollar bond and it said it would struggle to repay another three notes too in a filing with the Hong Kong stock exchange.

Another unexpected potential risk came from Greenland Holdings, a Shanghai state-backed developer, who sought in May to extend repayment of a USD488 million dollar bond maturing in June by a year.

CICC noted investors need to closely watch credit risk and see if recent stimulus measures aimed at boosting house sales assists struggling developers.