Chinese firms’ dollar-bond issuance hit the lowest level in a decade during the second quarter, and there are few near-term catalysts to reverse the trend as cheap onshore borrowing costs and economic uncertainty persist.
(Bloomberg) — Chinese firms’ dollar-bond issuance hit the lowest level in a decade during the second quarter, and there are few near-term catalysts to reverse the trend as cheap onshore borrowing costs and economic uncertainty persist.
Activity last quarter slumped 78% from a year earlier to $8.7 billion, according to data compiled by Bloomberg. From 2017 through 2021, quarterly totals regularly topped $40 billion. In contrast, dollar-bond issuance by European borrowers has been running near a record-high pace.
While slowing their dollar-bond deals, Chinese companies amped up borrowing onshore. Their issuance of yuan notes rose 18% in the second quarter to 4.37 trillion yuan ($603 billion), Bloomberg-compiled data show, trailing just the record set in the final three months of 2021.
Dollar-bond issuance by Chinese firms slowed the past 18 months as many central banks around the world embarked on one of the most aggressive tightening cycles in decades, sending interest rates surging. But China has been an outlier, keeping rates low. The latest batch of cuts were announced in June amid efforts to support the country’s slowing economy. Calls have been building for government stimulus.
“The market is expecting more rate hikes in the US and more cuts in China,” said Leonard Law, senior credit analyst with Lucror Analytics Pte. “This makes it more expensive to borrow in US dollars than yuan.”
Yields for 10-year Chinese sovereign debt fell below comparable Treasuries in April 2022 for the first time in a dozen years. The gap has grown since, nearing 120 basis points in recent days. Meanwhile, there have been concerns about Chinese borrowers’ credit demand despite the low costs.
“Many Chinese companies will focus on reducing capital expenditure, and we will see a slowdown of leverage demand amid moderate expectations of the country’s economic recovery,” said Charles Chang, Greater China country lead at S&P Global Ratings.
Meanwhile, global investors’ appetite for Chinese dollar bonds has been curbed by record defaults in 2022 and still-elevated levels this year. Goldman Sachs Group Inc. analysts have boosted their projection for 2023 delinquencies.
“There is a chance issuance could pick up again after summer if companies and investors see more stability in US interest rates — i.e. the Fed completes the two expected hikes being talked about now,” said Eastspring Investments fixed-income portfolio manager Wai Mei Leong.
Chinese firms’ largest dollar-bond deals in the second quarter were $500 million offerings from Bank of China Ltd., China Construction Bank Corp. and BOC Aviation Ltd., according to Bloomberg-compiled data.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.