Bond issuance by Chinese corporates is likely to recover over the remainder of 2017, after drying up in recent months. Market conditions should remain tighter than last year and some companies will continue to face restrictions on issuance, but refinancing needs are large and plans for strong infrastructure spending will also support issuance, says Fitch Ratings.
Onshore issuance of renminbi bonds by Chinese non-financial corporates fell by almost two-thirds in December-February, compared with a year earlier. A tightening of bond market conditions in late 2016 pushed up yields and made issuance less attractive. Some corporates have turned to banks for their borrowing, rather than the bond market.
Overall issuance was also held back by tighter rules on some companies - particularly property developers - issuing exchange-traded bonds. The restrictions are part of broader efforts by the authorities to contain risks associated with excess leverage, and to address overcapacity.
There have been some media suggestions that the decline in onshore issuance reflects a shift in preference toward the offshore market, in large part down to the authorities' efforts to counteract capital outflows by encouraging companies to issue offshore and repatriate the funds. However, the increase in cross-border issuance is not a major driver behind the sharp drop in the local issuance. Cross-border issuance remains small compared with local issuance.
Market conditions are still loose when viewed over a horizon of several years. Highly rated firms that had cancelled bond issuance in recent months are unlikely to continue shunning the bond market unless there is a further significant tightening of conditions, which we do not expect.
Corporates have large refinancing needs in 2017, with bonds worth CNY4.3 trillion maturing during the year - equivalent to half of total issuance in 2016. In addition, infrastructure fixed-asset investment is likely to rise from the CNY15.2 trillion recorded in 2016, and will require debt financing.