MNI: Mkt Conditions Not Favourable For China USD Debt Issuers

Chinese companies issuing offshore dollar bonds will struggle to place debt in the second half as issuance costs jump and dollar liquidity tightens on stronger capital controls and accelerated Fed rate hikes, market analysts said.

Both supply and demand for dollar-denominated debt issued by Chinese companies is soft considering a policy cap on domestic investors buying offshore notes, and as overseas funds are increasingly stepping aside from the Asian emerging bond market. As well, the onshore-offshore differential of issuance costs has reversed since March, said analysts at China International Capital Corp.

However, considering the over USD140 billion of heavy maturities, including USD21.9 billion from local government funding vehicles and USD31.9 billion from developers, the issuance of dollar debt may focus on refinancing.

Jiang Peishan, analyst at Haitong Securities, said investment-grade (locally rated 3B and above) dollar notes would edge up in price as yields of U.S Treasuries are peaking. But the high-yield debt of developers, particularly private firms, is still risky unless house sales get obviously improved and property funding regulations are further relaxed.

According to Haitong Securities, the yield of investment-grade debt, highly linked to yields of U.S Treasuries, kept rising in H1 and touched a record-high 5.16% in June, while high-yield dollar debt saw a 799bp surge in yields on risk concerns, reaching the highest at 27.9% in March and falling to 24.8% at June-end. In total, the average yield of offshore dollar bond was 200bps higher than that of onshore bonds in H1.

CAPITAL CONTROLS

By early July, outstanding China offshore dollar bonds reached USD862.8 billion. According to Huachuang Securities, about 15% of the funds invested are from onshore institutions, mostly via the channel of the Qualified Domestic Institutional Investor scheme (QDII).

But the State Administration of Foreign Exchange has granted just USD2.2 billion of QDII quota so far this year after adding USD31.8 billion in 2021 and USD21.7 billion in 2020 when the authorities eased capital outflows as the yuan rallied rapidly against the dollar. As of the end of June, SAFE has given 176 financial institutions a total of USD159.7 billion of QDII quota, (See: MNI: Yuan Seen Boosted In Q4 If U.S. Enters Recession-Analysts).

CICC predicted the quota would not see a large increase in H2, which would curb dollar liquidity in the offshore dollar-debt market. At the same time, overseas capital flowed out of Asian emerging bond markets at a net of USD28.6 billion in H1, and the trend is not expected to reverse unless dollar liquidity gets improved, CICC noted.

SHORTER DURATION

Chinese dollar-debt issuers are expected to seek shorter duration loans and raise coupon payments.

Wind showed that the rate of return of the debt was negative 7.9% in H1, for six straight months of decline and the lowest rate since 2008 which saw a minus 8% return rate. CICC predicts the whole-year return would be even lower than the minus 8%.

As of June 30, year-to-date issuance of dollar debt dropped nearly 27% to USD77.2 billion, the smallest in three years, and 87% of the debt was non-rated notes, according to Haitong Securities. The duration of new debt was at 3-to-5 years, taking 47% of the total issue amount in H1 and coupons ranged from 2% to 4%, it noted.

BAILOUT DEVELOPERS

A crucial factor for the offshore dollar debt market in H2, as analysts said, is if the liquidity and credit crunch of developers improves with policy help.

Chinese property developers account for over 23% of outstanding China dollar debt and repayment of developers’ high-yield debt by builders is now a combined USD3.7 billion of offshore bonds and USD6.1billion of onshore notes in Q3, (See: MNI:China Eyes Plans On Unfinished Housing Units Amid Boycotts).

CICC has warned investors on the heavy maturity of debt repayments in Q3, particularly the private and mixed-ownership developers, and the shorter durations of the portfolio for China dollar debt.