Chinese developers turn to onshore yuan debt, lower costs eyed

[HONG KONG] Chinese developers plan to eschew the offshore market and borrow more money onshore this year thanks to lower funding costs and improved liquidity on the back of government easing measures.

The move by Chinese property firms, which account for about one-third of the Asia high-yield market, coincides with interest rate cuts on the mainland and an expected hike in US interest rates later in the year.

Expectations of a weaker yuan, which fell 2.4 per cent in 2014, had also been driving the trend, though last week's dramatic one per cent bounce in the currency has now split market watchers on the currency's outlook this year.

Developers' drive back into onshore bonds comes despite a cooling housing market and a series of scandals such as Kaisa Group's failure to repay a coupon payment, which have dented investors' confidence.

Country Garden is just one developer that plans to borrow more onshore in yuan this year. The company, which has a market capitalisation of nearly 8 billion yuan (S$1.77 billion), wants to raise the proportion of its loans in yuan to 60 per cent this year from 50 per cent in 2014. "Interest for five-year medium-term notes in China is around 6 per cent, lower than offshore," Chief Finance Officer Wu Jian Bin told Reuters.

Country Garden recently paid 7.5 per cent on five-year senior notes but thinks that will drop to just 6 per cent when it issues onshore bonds later this year, said a company official who declined to be identified as the plan has not been finalised. "We are already seeing funding costs in onshore markets edging down because of monetary loosening. On the other hand, offshore market yields are going up due to RMB depreciation expectations," said Nathan Chow, CNH strategist with DBS Bank.

Yields on Chinese corporate bonds dropped by 50 basis points or more after the People's Bank of China cut interest rates in November and February and lowered bank reserve requirements (RRR). More cuts are expected in coming months as Beijing tries to meet a slower growth forecast of 7 per cent this year.

China's medium-term note (MTN) market reopened to real estate issuers last year after a four-year halt, although it is currently open only to China-listed firms. Regulators are expected to open it to Hong Kong issuers later this year.

Many Hong Kong-listed Chinese developers have expressed interest in borrowing in this market.

An executive at a Beijing-based H-share property firm said it hopes to raise more yuan debt this year - all of it onshore. "The yuan expectation is weak, so fewer investors will buy dim sum bonds, which means the issuing price for us will go up," said the executive, who asked not to identified as he was not authorised to speak to the media.

Dim sum bond issuance is set to fall this year for the first time since the Hong Kong market began in 2007 as it has become cheaper to issue on the mainland.

Yields on dim sum bonds issued by Chinese property developers have widened to at least 6.5 per cent in the last six months, reflecting investors' concerns over China's cooling property market, according to analyst Simon Colvin at Markit.

REUTERS