China’s growing use of international debt has been the single-most important story of the past three years in the Asian capital markets.
Corporate China is embracing overseas bonds as never before, taking advantage of low fixed-rate funds in US dollars either to fuel expansion plans or trim borrowing costs. This push is stepping up the pace of China’s internationalisation and transforming the Asian capital markets.
From 2% in 2009, mainland China issuers now account for 40% of all new dollar bonds sold in the region this year.
This staggering statistic, however, has sparked some serious discussions. Can China’s companies keep up with their rapid borrowing, or are overseas creditors set to find that they are still last in line when the workouts start?
Borrowing overseas is a risky business on both sides. Thanks to China’s restrictions on currency movements and security pledges, foreign creditors have little access to onshore assets and, typically, rank behind onshore lenders in events of default. Firms that borrow heavily overseas, too, face an uncertain future when the taps run dry – as recent events with Agile Property have underlined.
Still, there are many positives, too.
At a time when high-yield opportunities are few and far between, China’s corporate sector has offered global portfolio managers some extremely attractive investments. As more companies look offshore for funding, China’s banks have been able to recycle their own capital and manage their transition to Basel III compliance.
The Chinese authorities, too, have been happy to see lower-rated mainland borrowers reduce their use of shadow banking alternatives, such as trust loans, bringing down the risk in the domestic banking system.
International borrowings also bring global standards to the Chinese market, where credit risk remains a murky concept. Overseas capital comes with greater demands for transparency and disclosure, since concerns around corporate governance are never far from foreign investors’ minds.
Discussion at the IFR China Corporate Funding Roundtable revolved around the outlook for Chinese borrowings and, in particular, for the property sector, which accounts for two thirds of all high-yield bonds issued out of China this year.
There is unlikely to be any straightforward answer to that question. While some companies – and, indeed, some sectors – look healthier than others, bondholders have learnt not to treat every Chinese investment with the same broad brush. Much of the offshore debt raised in recent years has simply replaced more expensive onshore borrowings, but the opening of another fundraising channel also allows companies to increase their leverages, with potentially serious consequences.
The panel, however, was unanimous in asserting that the market for Chinese corporate debt had become both deeper and more sophisticated. As more capital crosses China’s borders, it has to be a good thing.
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