Chinese corporate dollar debt issuance falls at record pace

CHINESE companies are curbing their dollar borrowings at a record pace this year, stung by a property debt crisis on top of rising rates that have dragged down corporate financing in the currency nearly everywhere.

The amount of dollar bonds issued and loans taken out by Chinese corporates has slumped 46 per cent to US$101 billion, the largest decline for similar periods of previous years in data compiled by Bloomberg. That compares with a 25 per cent drop so far in 2022 among firms in the Asia-Pacific region excluding China and a 30 per cent decline in issuance of US currency notes by all companies globally.

The slide in issuance from Chinese borrowers is in line with global trends, with firms from Beijing to Sao Paulo increasingly avoiding dollar-debt markets given surging interest rates and dollar strength, as the Federal Reserve ramps up its fight against inflation. But the shift by Chinese companies towards the nation’s local debt market stands out. Rate cuts by its central bank have helped send local financing costs to record lows while monetary authorities elsewhere in the world have tightened recently.

It’s now cheaper to borrow in yuan than it is in dollars, so even export-oriented companies that earn revenue in dollars have been switching to yuan financing at the margin, said Adam Wolfe, emerging markets economist at Absolute Strategy Research.

The Fed’s tightening cycle has weighed on global dollar debt sales as interest rates have spiked, sending notes to their first global bear market in a generation. The European Central Bank just made its biggest-ever rate hike, ahead of the Fed’s upcoming meeting.

Global dollar-bond issuance jumped last week, with Japanese companies driving such activity in Apac, as borrowers raced to get ahead of potentially still-higher costs. But Chinese firms, which make up 38 per cent of this year’s dollar-note issuance in this region, have sold around 10 per cent of this month’s total.

Instead, mainland borrowers are increasingly looking closer to home as China’s monetary policy diverges from other nations. Yuan-denominated bond issuance has overtaken global dollar-note sales in recent months amid some of the cheapest-ever funding costs domestically. Authorities including the People’s Bank of China (PBOC) have been stepping up efforts to support a lacklustre economy hurt by the Covid-Zero policy and a worsening housing crisis.

“We don’t expect any reversal of the trend in short term as the divergence in PBOC and Fed policy is set to continue,” according to Owen Gallimore, head of Apac credit analysis at Deutsche Bank. Because of falling bond issuance, he predicts investment-grade Chinese dollar notes will outperform for 2022.

Chinese firms have also been opting to sell bonds in the offshore yuan. Issuance so far this year of so-called Dim Sum notes has surged 59 per cent to US$25 billion, the most since 2014, according to Bloomberg-compiled data.

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Developers had been among China’s biggest dollar-bond issuers. But that channel has largely been cut off to the sector in light of record defaults as home sales have fallen for more than a year and the government clamped down on property-related debt growth. In a bid to increase oversight of foreign debt risks, Beijing has proposed requiring Chinese borrowers to register, report and receive approval for sales of offshore notes with tenors exceeding one year. BLOOMBERG