Rise in offshore bond issuance may continue

Offshore bond issuances by Chinese corporates are likely to continue to rise this year, having hit a record high last year, as onshore market conditions might remain tight amid continued regulatory efforts to contain financial risks, said Fitch Ratings in a report.

“Among the offshore bonds issued in 2017, Chinese corporate bonds quoted in US dollar were widely distributed in 37 industries,” said Zhang Yu, manager of the macro fixed-income department at Minsheng Securities’ research office. “Banking industry ranked the first, followed by the real estate industry.”

Chinese corporates’ onshore bond issuance slumped by 32 percent to 5.7 trillion yuan ($899.70 billion) in 2017, the first annual decline since 2010, as regulatory tightening pushed up funding costs.

Some sectors, such as property, also faced specific restrictions on onshore issuance. These trends drove offshore issuance by Chinese corporates to a record high of $117.8 billion in 2017, up 123 percent year-on-year.

“The move of deleveraging is likely to lead to higher profit of bonds quoted in renminbi,” said Harsh Agarwal, an analyst at Deutsche Bank. “As massive domestic bonds will expire within this year, Chinese borrowers may issue more offshore bonds quoted in US dollar.”

The authorities have moved to close loopholes and further increase control over leverage in recent months, suggesting that there could be more upward pressure on onshore yields this year.

Meanwhile, new regulations should make it harder for credit to be channelled to restricted sectors through, for example, trust loans. This will further reduce onshore funding options for those sectors.

Onshore issuance is, therefore, likely to drop again this year. Onshore refinancing needs are also lower — a total of 3.7 trillion yuan in onshore corporate bonds were due to mature within one year at the end of 2017, down 8.6 percent from the end of 2016.

Financing needs for infrastructure are also likely to drop this year, as investment growth continues to slow.

The amount of US dollar-quoted Chinese offshore bonds is expected to maintain growth momentum. The maturity value of US dollar-quoted Chinese offshore bonds will be $58.8 billion, $86.6 billion and $94.6 billion from 2018 to 2020 respectively, up from $35.2 billion in 2017, according to statistics from Bloomberg.

It is predicted more bonds will be issued in the future.

Companies may face some headwinds in offshore issuance. For example, the National Development and Reform Commission, or NDRC, China’s top economic planner and regulator, is reportedly considering restricting short-term offshore note issuance, through which some issuers bypass the offshore issuance quota set by it in 2017.

Nevertheless, tight onshore conditions and higher offshore refinancing needs suggest that offshore issuance will increase further this year.

According to Fitch, the shift toward the offshore market has led to a significant rise in corporate sector risks, which still lie mainly with high domestic leverage. Regulators are not expected to take harsh measures to restrict corporates’ access to offshore funding, market insiders said.