APAC corporates' cross-border issuance of foreign-currency bonds almost doubled in 2Q17 to hit a record high, led by a surge in issuance by Chinese companies. Tight domestic funding conditions are likely to keep Chinese cross-border issuance relatively high during the rest of the year, says Fitch Ratings.
Outstanding foreign-currency debt of Chinese corporates is still low and should not pose a systemic risk to debt sustainability, but strong issuance could create isolated vulnerabilities.
The USD61 billion in cross-border bonds issued by APAC corporates in 2Q17 was a new record for a single quarter and a sharp rise from USD35 billion in 1Q17; 1H17 already represented 87% of the total for 2016.
Chinese firms accounted for most of the increase, rising to USD35 billion - also a record - from USD17 billion in 1Q17. There were also strong qoq increases in issuance by corporates in Hong Kong, Australia, Korea and Indonesia. Asian investors are increasingly looking to Indonesian bonds as a way to diversify away from Chinese exposure.
Chinese corporates are going offshore in response to tighter conditions and higher yields in the local market, as the government has clamped down on risky practices in shadow banking and imposed certain restrictions on borrowing to contain leverage. Bond market access of almost all corporates has been affected.
Accordingly, Chinese corporates' onshore issuance fell by 29% yoy in 2Q17, to CNY1,250.9 billion (USD181.3 billion). There were 256 primary market deals amounting to CNY225.3 billion cancelled or delayed.
Cost of US dollar bond issuance remained flat
In contrast, the cost of US dollar bond issuance has remained relatively flat, and therefore become more attractive - particularly for investment-grade corporates. Moreover, concerns about a fall in the renminbi - which would push up the cost of servicing foreign-currency debt - have faded this year.
More targeted restrictions have also pushed some Chinese corporates into offshore issuance. For example, rules on property developers tapping the onshore exchange-bond market were tightened in November 2016, which drove a 10-fold increase in their cross-border issuance in 1H17 versus 1H16. Property developers accounted for 40% of all Chinese offshore issuance in 2Q17.
Chinese cross-border issuance is likely to remain relatively strong so long as domestic funding conditions stay tight, but there are factors that could slightly dampen activity in 2H. First, Fitch expects the Fed Funds rate to rise by 50bp by end-2017 and another 100bp in 2018, while we expect no further broad-based tightening by the People's Bank of China. This would weaken the incentive for cross-border issuance, and might trigger renewed renminbi fears.
Second, the National Development and Reform Commission (NDRC) warned on 12 June that companies that fail to pre-register offshore issuance with a maturity of more than one year will be blacklisted. Some issuers have raised funds through short-term offshore notes, but that could prompt further action from the regulator.
Companies that take on significant foreign-currency debt compared with their balance sheets could be exposed to renminbi depreciation, particularly if they are highly leveraged. However, most cross-border issuance has been undertaken by large, relatively creditworthy firms. This is to be expected, since these are the firms with greater access to international capital markets, but it also limits the risk that they will run into trouble as a result of recent issuance.
In any case, total foreign-currency borrowing accounts for only a tiny fraction of Chinese companies' aggregate borrowing. It is the corporate sector's large local-currency debt that poses the bigger systemic threat.