More firms ready to sell bonds abroad

Firms looking for alternative channels to lower financing costs

More Chinese companies are expected to sell bonds in overseas markets this year, continuing the trend in 2017 as they seek to take advantage of lower financing costs in offshore markets and a stronger domestic currency, analysts said.

Offshore bond issuance by Chinese companies saw explosive growth last year, with the total funds raised by Chinese companies expected to exceed $190 billion, more than seven times higher than in 2016.

Such a trend will continue in 2018 as Chinese companies look to diversify their funding channels with lower financing costs, said Ivan Chung, a senior analyst at credit ratings agency Moody’s Investors Service.

Onshore interest rates have risen steadily over the past year, with the yield of 10-year treasury bonds reaching 3.9 percent and the average interest rate for corporate bonds jumping to 6.72 percent, according to financial data provider Wind Info.

Tighter liquidity at home, higher financing costs and loosened regulation, that made it easier for Chinese companies to sell offshore bonds, were the main reasons for the surge of bond issuance in overseas markets, analysts said.

“As the onshore market experienced rising bond yields, the regulatory reforms facilitated onshore issuers to switch to offshore issuance and tapped the US dollar market in 2017,” Chung said.

Analysts said liquidity conditions will likely remain tight in China as the authority will continue with a prudent monetary policy to curb financial risks and asset bubbles, which means the fundraising cost for domestic companies will stay at a relatively high level. They added that the expectation of a stronger yuan will also encourage more companies to raise dollar-denominated bonds in overseas markets.

Chung said greater demand by international investors for long-term and high-yield bonds, better liquidity of overseas markets as well as the desire to penetrate into international business will continue to drive the offshore bond issuance by Chinese issuers.

While real estate developers have been the main driver of offshore bond issuance, public finance issuers such as Stateowned companies that serve as the financing vehicles for local Chinese governments will join the trend in 2018, tapping overseas capital to fill the financing gap for civil infrastructure projects.

“Investors have shown growing interest in offshore bonds issued by local government financing vehicles as they could offer good yields with relatively low default risks. We expect more such bond issuance in 2018,” said Samantha Xie, China head of debt capital markets at JPMorgan Chase & Co.

But Cheng Chunshu, deputy director of Golden Credit Rating International, said that financing cost for Chinese companies in overseas markets will also rise in 2018 as the US Federal Reserve continues with its rate hike plan, which will narrow the gap between the onshore and offshore interest rates. Wang Yanfei contributed to this story.