Fitch: Chinese Corporate Issuance to Continue to Shift Offshore

Offshore bond issuance by Chinese corporates is likely to rise again in 2018, after hitting a record high last year, as onshore market conditions are likely to remain tight amid continued regulatory efforts to contain financial risks, says Fitch Ratings.

Chinese corporates’ onshore bond issuance slumped by 32% to CNY5.7 trillion in 2017, the first annual decline since 2010, as regulatory tightening pushed up funding costs. Some sectors, such as property, also faced specific restrictions on onshore issuance. These trends drove offshore issuance by Chinese corporates to a record high of USD117.8 billion in 2017, which was an increase of 123% on the previous year.

The authorities have moved to close loopholes and further increase control over leverage in recent months, suggesting that there could be more upward pressure on onshore yields this year. Meanwhile, new regulations should make it harder for credit to be channelled to restricted sectors through, for example, trust loans. This will further reduce onshore funding options for those sectors.

Onshore issuance is therefore likely to drop again this year. Onshore refinancing needs are also lower – a total of CNY3.7 trillion in onshore corporate bonds were due to mature within one year at end-2017, down 8.6% from end-2016. Financing needs for infrastructure are also likely to drop this year, as investment growth continues to slow.

Companies may face some headwinds in offshore issuance. For example, the National Development and Reform Commission (NDRC) is reportedly considering restricting short-term offshore note issuance, through which some issuers bypass the offshore issuance quota set by the NDRC in 2017. Nevertheless, tight onshore conditions and higher offshore refinancing needs suggest offshore issuance will increase further in 2018.

Fitch does not believe that the shift towards the offshore market has led to a significant rise in corporate sector risks, which still lie mainly with high domestic leverage. Most issuers have not taken on excessive foreign-currency debt relative to their local-currency cash flow, and we do not expect regulators to take harsh measures to restrict corporates’ access to offshore funding.
Source: Fitch Ratings