February 13, 2018 / 5:12 AM / 11 days ago

Chinese firms tipped to sell more dollar bonds despite Fed rate hike forecasts

HONG KONG (Reuters) - Chinese companies are expected to raise more funds in the global dollar bond market this year after robust issuance in 2017 even as inflation fears trigger speculation that major central banks might raise interest rates more aggressively.

Tight regulation and rising funding costs in China have pushed many Chinese firms to shift their fund-raising activities from the onshore to offshore market in the past year, resulting in a sharp drop in mainland bond issuance.

“The clampdown on some types of bank credit, particularly shadow banking and interbank activities, has pushed up corporates’ funding costs in the onshore market,” Fitch Ratings said.

“Corporates have responded by shifting issuance towards the offshore market. These trends are likely to continue in 2018, with little sign that the authorities are set to loosen their stance,” it said.

The amount of offshore dollar corporate bonds issued by Chinese corporates doubled in 2017 to $211 billion, in deep contrast to the shrinking onshore market, according to statistics from Natixis.

Beijing is in its second year of a deleveraging campaign to reduce financial risks rooted in a rapid build-up of debt and riskier types of financing. The People’s Bank of China said on Tuesday it will step up macro-prudential management for shadow banking and real estate financing.

“Funding costs will still be cheaper offshore, though the U.S. Federal Reserve is set to raise interest rates multiple times this year,” said Steve Wang, head of fixed-income research at Bank of China International, adding that it takes time for short-term rate hikes to be transmitted to longer terms.

“In addition, Chinese corporates have needs to diversify their funding sources so that they can minimize the impact from possible policy changes in China,” Wang said.

As an example of funding cost differentials, Chinese real estate developer China Vanke, rated BBB, has an onshore bond yielding 5.6 percent with a duration of 4 years, while its offshore three-year bond yields 3.7 percent, bankers say.

“Deal flows of dollar bonds remains quite strong this year, both for refinancing needs and new issues. We already have a lot of deals in the pipeline that will be completed in the first half of the year,” said a debt capital markets banker at an American bank in Hong Kong.

“Many Chinese private companies which have overseas M&A projects prefer to raise funds directly in global dollar market since they do not have to transfer funds cross borders which may be an issue when China tries to contain capital outflows,” the banker said.

Dollar bond issuance by Chinese corporates amounted to $22.3 billion in January, compared to 1.5 billion yuan ($238 million) in bond issuance in the onshore market, according to statistics from Bank of China International.

Adding to the strong momentum of dollar bond issuance is the strength of the Chinese yuan, which means Chinese issuers may pay less in the future in dollar terms if the yuan continues to appreciate.

The yuan has gained about 4 percent against the U.S. dollar so far this year. It appreciated 6.8 percent in 2017, its best annual performance since 2008, reversing three straight years of depreciation.

Reporting by Michelle Chen; Editing by Kim Coghill

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