China’s onshore and offshore markets have been fascinating to watch this year with international and domestic influences pulling the two in different directions, while the collapse in China’s real estate sector has left anyone exposed to property issuers with a bitter taste in their mouths.
Local credit markets are strong. The People’s Bank of China is forging its own interest rate path, easing monetary policy to support the local economy, while central banks elsewhere favour high interest rates to curtail inflation. The PBoC’s stance has bolstered local liquidity, but has also weakened the value of the renminbi.
International bonds have sold off sharply in response to central banks trying to stave off the economic impact of higher energy and food prices. Bonds issued by Chinese borrowers have been swept up in the rout and international investors are additionally cautious due to the property crisis, the government’s approach to managing Covid and rising international tension with the US over Taiwan. Offshore issuance volumes from China in 2022 are considerably lower compared to 2021.
Nevertheless, higher rated issuers from China issuing in US dollars can still be assured of a strong onshore bid from liquid local investors taking advantage of the yield pick-up to comparable renminbi paper. The strength of onshore demand and a lack of China supply has been good news for other credits in the region, notably those from South Korea, as investor demand spills over into debt issued from neighbouring countries.
And there are routes other than dollars for Chinese issuers looking to borrow offshore. Offshore renminbi issuance has doubled in 2022, as the higher yields on offer in the Dim Sum market tempt onshore investors.
Progress in integrating onshore and offshore markets is ongoing and will make further advances as the importance of the Chinese capital markets to the wider world increases. The Stock Exchange of Hong Kong’s Stock Connect, Bond Connect and ETF Connect are proving invaluable in facilitating flows between the two markets.
Credit discipline is still important if bond markets are to function efficiently, as defaults spread from the property industry to other private-sector issuers. Guarantees and other credit enhancements are being used to enable lower-rated borrowers to access the market.
But what would really help bond volumes improve in the short term is a property recovery. There is hope. The PBoC and the China Banking and Insurance Regulatory Commission have outlined 16 steps under which banks can support Chinese property developers.
There will be challenges – and opportunities ahead.
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