China: Short term and offshore funding gain popularity among capital hungry issuers

• China's offshore USD corporate bond issuance with maturity longer than one year has increased 148% YoY to 12.9 USD billion in October. Together with the stellar performance so far, this leads to a doubling of offshore issuance by Chinese corporates and financial institutions in 2017. Short term bond issuance of non-financial corporates has expanded to almost 8% of YTD total issuance and amounted to 7.3 USD billion, in contrast to 0% last year. This type of short term funding is increasingly popular for property developers and high leveraged issuers as no approval is required from the National Development and Reform Commission (NDRC). However, the relief for capital hungry issuers also comes with higher funding cost and increasing liquidity risk.
• Offshore funding costs have surged, especially obvious in high yield issuers with a 40 bps increase. We believe the global selloff of high yield bonds and the worries on the Chinese economy stemming from weaker activity and higher inflation are the key forces behind this trend. On the other hand, onshore funding costs have also increased but at a much slower pace than the offshore market. This has led to narrowing yield differentials across all ratings.
• One of the consequences of higher offshore funding costs is that the yield differentials between offshore and onshore market has turned negative, indicating that the offshore market has become less attractive for issuers. This contrasts with the surge in high yield offshore issuance and such issuance could of course be driven by factors other than the funding cost. The likely one is the increasingly difficult access to additional leverage onshore given the government’s tougher stance on that issue. The other potential reason relates to the more difficult financing of overseas acquisitions with onshore funding due to the recent regulatory crackdown. This naturally increases demand for offshore issuance.

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